UK, Denmark and NZ most exposed to house price and interest rate shocks

Fitch Ratings said in a special report published today that the UK, Denmark and New Zealand exhibit the greatest macroeconomic vulnerability to a combination of weakening property prices and rising interest rates.

"Given record levels of household debt, rising interest rates and after several years of strong house price inflation in many countries, Fitch has assessed a range of indicators of household balance sheet vulnerabilities and house price valuation measures," said Brian Coulton, Head of Global Economics & Europe, in Fitch's Sovereign team. "For overall vulnerability, New Zealand ranks first, Denmark second and the UK third as the most exposed countries. Japan, Germany and Italy are the least vulnerable."

Fitch has ranked countries by the degree of estimated house price overvaluation and household balance sheet exposure to interest rate risk, compiling an overall index of vulnerability for 16 advanced industrialised economies. A range of financial indicators have been used to estimate these exposures, discussed in detail in the report.

On the house price front, France is the most exposed country to housing overvaluation, followed by UK, Denmark and New Zealand, which all exhibit the highest (i.e. most vulnerable) rankings, reflecting rapid house price growth including relative to incomes and rents. The US, Spain and, to a lesser extent, Ireland, show lower risk on this front although housing supply dynamics - not captured in the exercise - undoubtedly play an important role in current and prospective house price movements.

With regard to balance sheet exposure, the Nordic countries and Australia and New Zealand have the highest ranks. Norway is the most exposed to household debt vulnerability followed by New Zealand, Australia, Denmark, Finland and then Sweden. However, on this score, the UK fares somewhat better thanks to lower debt and interest service ratios and overall household net worth. France also scores much better on balance sheet risk, sharply reducing its overall vulnerability.

Again, the US and Spain fare relatively well but this may be misleading to the extent that both countries currently have high overall household debt service ratios (i.e. including interest and principal repayments), an indicator that has not been captured in the study due to data limitations. Moreover, both Spain and the US have arguably experienced the largest interest rate "shocks" among countries in the sample as real policy rates have moved rapidly into positive territory in the last couple of years.

The full report, "House Prices and Household Debt – Where are the Risks?" is available on the agency's public website, www.fitchratings.com.

NZD has topped, retracement headed to 0.7400 area

The NZ dollar has topped out at 0.8109, nearly 17% from the lows seen at 0.6715 in March 2007. Now looks to retrace and could pull back into the 0.7400 area before stabilising.

The reason?

Not our economy, Not the RBNZ actions, Not any Government moves.

Purely offshore pressures.

See story below: Volatility sweeps global markets.

That's the reason: the rise of global risk aversion; something the RBNZ has been praying would happen.

Investors are pulling money home, worried about potential losses. It could run some way yet, as the US property market disasters come home to roost.

That means, currencies that were weak, like the Yen and Swiss franc, will be stronger, as funds are repatriated.

Currencies that were strong, like the NZD, AUD and GBP, will be weaker, as funds are withdrawn.

That means the NZD will weaken.

Might not go too far yet, but that is the trend, with the first target 0.7500.

What would stop this going too far are calm markets.

8.25% return is hard to beat, and that means the NZD cannot stay down for long. Equally the Japanese will not want a strong Yen, and may talk of intervention again.

But for now, and the next few weeks, the NZD is finally on the back foot.

Volatility sweeps global markets

From the BBC site:

US stock markets have dropped sharply, extending a global share sell-off amid fears about the effect of higher interest rates on the world economy.

There are concerns that higher rates will hit corporate profits and takeover deals, and dent consumer spending. European markets were also jittery, with London's share index closing down for a fourth day and ending at its lowest level since the middle of March. Analysts have warned that markets could remain volatile for a number of weeks. "I think you've got bargain hunters out there for sure and I think you've got some people who are still scared," said Randy Frederic of Charles Schwab & Co. "We're seeing the convergence of a whole host of sort of unrelated or only slightly related issues," he explained.

Share fall
By the close of trading in New York, the Dow Jones Industrial Average of leading shares was 208.1 points, or 1.5%, lower at 13,265.47.
Since Monday the index has lost 4.2%, its worst weekly decline in almost five years. The wider measure of the US stock market, the S&P 500, ended down 1.6%, while the Nasdaq index, which largely tracks technology stocks, was 1.4% lower. Earlier, the FTSE 100 index of leading shares on the London market had closed 36 points, or 0.6%, lower at 6215.20. France's Cac-40 index of leading shares and Germany's Dax also declined. In Asia, the Wall Street slump on Thursday led to Japan's Nikkei closing down 418.28 points, or 2.4%, at 17,283.81, while Hong Kong's index ended 2.7% lower.

Credit crunch
The main underlying problem is that many investors are worried about an impending credit crunch. In past years, financial markets, companies and consumers have all benefited from low interest rates and easy access to money, helping fuel a boom in spending, house price inflation and corporate takeovers.

Now, interest rates are rising and set to stay higher as central banks try to rein in inflation. A large part of the rise in share prices in the past year has been driven by the takeover boom, with private equity bidders pushing up the value of the firms they are targeting. Most of these deals are paid for with borrowed money and the banks who have loaned this cash have been laying off a large proportion of the loans by selling them to other investors.

However because investors are bruised by their losses in the US sub-prime mortgage market, they are now less keen now on buying the risky loans from the banks, taking away the credit needed for takeovers and prompting share prices to fall. "When there's uncertainty about financing, then private equity is not so quick to make deals," said Elliot Spar of Ryan Beck & Co.
Fred Dickson of D.A Davidson & Co said that: "We've had this massive change in investor expectations in terms of new deal flow." "The lifeguards have shouted, and investors are now starting to heed their warnings and head back to shore."

Downhill track

At the same time, oil prices have climbed, raising fears that inflation could also pick up again because of higher energy costs. US markets bounced back slightly on Friday after figures showed that the US economy had grown more quickly in three months to June than analysts had first thought. US Commerce department data showed that, on an annual basis, the US economy grew by a robust 3.4% in the second quarter of 2007. However, the respite was short-lived as analysts fretted that the figures may increase the chances of further interest rate rises in the US.

Link: BBC News

NZD now over 0.7700

As expected, the NZD has moved over 0.7700, as posted previously in April.
Still looks to have the legs to test into the 0.7900/0.8000 area, but starting to look overdone there.

Some reasons:

NZ is a democracy.
NZ is AAA rated.
NZ does have sovereign fiscal surpluses.
NZ has no exchange control.
NZ has free and open borders.
NZ has an independent legal system.
NZ is benefiting from a commodity boom, especially in dairy prices.
NZ is well away from the trouble spots of the world.
The USD itself is weak.
Japanese and Swiss interest rates are low.

Oh, and New Zealand has the highest interest rates in the industrial world.

Certainly a factor, but not the only factor. If high interest rates created strong currencies, then latin american countries in the past would have had the strongest currencies in the world.

NZ exporters need to sell on value not on price. NZ exporters need to be the Prada of their industry. The currency should not be an issue. By arguing for a lower NZD all the time what they are really saying is "this is crap and the only reason you will buy it is because it is cheap".

NZ lamb and NZ products should be expensive on the world markets because they are the best.
There is no comparison between NZ lamb feeding on fresh grass and living in a clean, green environment, drinking pure water etc and what they call a herd in Europe feeding on meal pellets and god knows what.

Until we learn this lesson and stop selling on price certain exporters will always be bleating.

The recent debate in the UK had the Irish companing our lamb was too cheap! We should immediately put the price up so that we are the most expensive..because we are the best!!

Excellence attracts customers, just look at New Zealand wine.

A few good men

This was too good to pass over:

I've stolen this from Rod Drury. It's a great take-off of the Jack Nicholson speech in A Few Good Men.

Sales: “You want answers?”

Finance: “I think we are entitled to them!”
Sales: “You want answers?!”
Finance: “I want the truth!”
Sales: “You can’t handle the truth!!!”

Sales (continuing): “Son, we live in a world that requires revenue. And that revenue must be brought in by people with elite skills. Who’s going to find it? You? You, Mr. Operations? We have a greater responsibility than you can possibly fathom.

You scoff at sales division and you curse our lucrative incentives. You have that luxury. You have the luxury of not knowing what we know: that while the cost of business results are excessive, it drives in revenue.

And my very existence, while grotesque and incomprehensible to you, drives REVENUE! You don’t want to know the truth because deep down in places you don’t talk about at staff meetings … you want me on that call. You NEED me on that call!

We use words like comps, migration, discounts, flex licensing, global purchase agreements, butt-fusion. We use these words as the backbone of a life spent negotiating something. You use them as a punch line!

I have neither the time nor inclination to explain myself to people who rise and sleep under the very blanket of revenue I provide and then question the manner in which I provide it. I would rather you just said “thank you” and went on your way. Otherwise I suggest you pick up a phone and make some sales calls. Either way, I don’t give a damn what you think you’re entitled to!”

Finance: “Did you expense the lap dances?”
Sales: “I did the job I was hired to do.”
Finance: “Did you expense the lap dances?”
Sales: “You’re goddamn right I did!”

Hat tip: David Farrar

Beware the global slowdown

This is an excellent article by Ulf Schoefisch in the Dominion Post. I have only just spotted it.
It highlights that with all the hue and cry about a stronger currency in the MSM it could be (as it has been in the past) an offshore shock that eventually drives the NZD lower.

New Zealand Dollar...0.7700 here we come?

The NZD/USD continues to press higher. The average change from high to low over the last 15 years has been 15%. That is, if you take the high in any one calendar year, then the low, work out the difference and average that over 15 years you get 15%. So that’s about 10 cents worth of change, historically.

The issue then becomes, is this year going to be a 0.7000-0.6000 band or a 0.6500-0.7500 band. Given that the low was just below 0.6700 in March 2007, and we are at 0.7360 now, then 0.7700 is possible this year, and it is just a normal year.

So those looking for a test of the post float high at 0.7467 in March of 2005 may yet get their wish.

Of course, all this is based on a weaker USD itself. This has been the case for a while now, as economists have fretted over the state of the US economy, and the arguments over whether US interest rates will go up further or come back again. I think the US will sit tight on their current interest rate settings. That means that unless the USD has a major shock, all time USD weakness this year should prove elusive.

Alan Bollard still looks reluctant to raise interest rates at best, and as long as our Finance Minister does not go and spend like a drunken sailor in the budget in May, Bollard may also, like the US, sit tight, and let the current settings do their work.

Don’t believe all the hype about the property market. Bollard focuses on that because it is a problem. And he gets a lot of press on that. But the bigger problem is government spending. For the first time in many years we have a finance minister with no debt constraints.

If you take Central Government, Local Government, Regional Councils, SOE’s (including power companies) they are probably over 50% of the economy. They are where the inflation is coming from….and raising interest rates does not affect them.

So the problem is, politicians need to spend to curry favour. Alan Bollard will be waiting to see what Cullen does. An expansionary budget means higher interest rates as monetary policy tries to lean against fiscal policy.

Then we will see a test of the post float high of 0.7467 and who knows, maybe a 0.7700 plus exchange rate.

A lovely present for hard done by exporters in Exporter year…. it’s in the governments hands now.