Business & Investing: Investors cautious over news of a trans-Tasman travel bubble, plus the services sector remains under pressure

Services sector performance slides in November
Migration numbers remain subdued
NZX trading fault delays start of trade
No deal Brexit now looking increasingly likely

Rise in Chinese state-owned companies defaulting has rating agencies on notice

Despite confirmation the Government plans to have a Trans-Tasman bubble in place by the end of March next year at the latest, tourism stocks failed to rally on the news, as the overall market lost ground yesterday.

Shares in Tourism Holdings closed unchanged at $2.60, SkyCity Entertainment shares ended the day down 1.2 percent at $3.33, Auckland International Airport shares fell 2 percent to $7.95 and Air New Zealand shares were barely changed at $1.89.

Some investors may have been hoping the travel bubble would be in place before Christmas, however in her final post-Cabinet media conference of the year, Prime Minister Jacinda Ardern said the two countries were not yet ready to fully open borders to one another this year, adding there were still several arrangements that needed to be finalised, particularly in regard to any new outbreak in Australia once the travel bubble had been established.

Services sector performance slides in November

The latest BNZ-BusinessNZ performance of services index confirms the sector remains under pressure after steadily improving in recent months.

The PSI for November came in at 46.7, down 4.1 points from October. A PSI reading below 50 indicates the sector’s activity is contracting. Last month’s reading was the lowest since May.

The lower-than-expected result also saw the three-month running average fall just below the 50 breakeven level in November at 49.2.

The supplier deliveries sub-index was 39.8, while the activity/sales reading was 45.5 and inventory 45.2.

BNZ senior economist Craig Ebert said the result paints a picture of momentum lost, after a couple of months of solid rebound in June and July.

After a positive PMI result on Friday, the PSI number contradicts other recent economic data that has been broadly positive.

The highly anticipated third quarter GDP number due out on Thursday is expected to show a strong rebound in economic activity.

Migration numbers remain subdued

Migration in October continued to track down, with fewer than 1000 people a month entering the country long term, down by more than 90 percent compared with a year ago.

According to Statistics NZ, there was a net migration gain (long term arrivals minus long term departures) of just 884 people in October, compared to 10,224 in October last year.

There were a total of 2618 arrivals in October and 1733 departures, resulting in that net gain.

That compares with 17,121 arrivals in October last year and 6897 departures.

There was a net gain of 1227 New Zealand citizens in October, with 1639 arrivals and 411 departures.

NZX trading fault delays start of trade

Yet another “technical fault” was responsible for delaying the opening of the share market yesterday until 11.30am.

The NZX said a connection issue between its core clearing and settlement system and its trading platform had caused the problem.

It’s the latest in a series of technical failures that have plagued the NZX this year. Following a series of major problems in March, the exchange commissioned two reports and has formed a technical sub-committee to better manage its systems and overhaul aspects of its trading platform.

No deal Brexit now looking increasingly likely

The scenario that markets were desperate to avoid is now looking increasingly likely as talks between the United Kingdom and the European Union over a Brexit deal appear destined to fail.

The talks were initially extended until Sunday after Wednesday’s meeting between European Commission President Ursula von der Leyen and the UK Prime Minister Boris Johnson, billed as a “last-ditch effort,” ended without an agreement.

No new deadline has been announced on Sunday, but von der Leyen said it was responsible to go as far as possible towards securing a last-ditch deal.

Speaking in London, Johnson said the talks remain deadlocked with the two sides still “far apart on key issues.”

The European Union and the UK have been trying for months to agree on a trade deal before the Brexit “transition period” officially ends at midnight on December 31. Earlier this week, a joint statement by Johnson and von der Leyen cited three “critical” sticking points: fishing rights, the UK’s ability to diverge on EU standards, and legal oversight of any deal.

Failing to reach a trade deal would be economically painful for both the EU and the UK, although the impact on the UK would be disproportionately larger, because the EU is by far its biggest trading partner. Losing access to its single market would cut UK’s businesses off from Europe’s 450 million consumers and burden them with extra tariffs and red tape.

The UK Office for Budget Responsibility (OBR) estimates that a no-deal Brexit would knock off £40 billion (NZ$75 billion), or 2 percent, of the UK’s economic output in 2021, and leave more than 300,000 people unemployed by the second half of next year.

Rise in Chinese state-owned companies defaulting has rating agencies on notice

Recent cases of Chinese state-owned companies defaulting on their debts is raising alarm bells among international credit rating agencies. It’s a problem analysts have warned has the potential to ripple through the country’s financial system, ultimately impacting China’s economic growth and potentially spilling over into global markets more broadly.

State run companies defaulted on a record 40-billion-yuan (US$6.1 billion) of bonds between January and October this year, according to Fitch Ratings. The total exceeds the last two years of defaults combined.

The problem has only gotten worse in recent weeks. A slew of major companies — including BMW’s Chinese partner Brilliance Auto Group, top smartphone chip maker Tsinghua Unigroup, and Yongcheng Coal and Electricity — declared bankruptcy or defaulted on their loans last month. As a result, corporate bond prices have plummeted, interest rates have spiked higher and the turmoil has even spilled over into the stock market, where shares of state-owned firms have fallen.

The success of the state sector is critical to China’s financial system. While such businesses contribute less than a third of GDP, they account for more than half of the bank loans offered in China and some 90 percent of the country’s corporate bonds, according to data from the People’s Bank of China and Chinese brokerage firm Huachuang Securities.

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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