Volatility at 4 year high; factories slower; PBoC about to cut reserve ratio; China state pension funds released; UST 10yr yield 2.05%; commodity prices fall; gold rises; NZ$1 = 66.8 US¢, TWI-5 = 70.9

Here’s my summary of the key events over the weekend that affect New Zealand, with news of a sudden bout of risk aversion by investors.

The CBOE VIX took a dramatic jump higher at the end of trading on Wall Street, in fact to its highest level since 2011.

This was because equity markets fell – China was down -4.3%, Europe -3.2% and the US -3.2% – as are commodities – the CRB index was down -1.7% – as are US interest rates and the US dollar. Concerns about China and fresh Greek exit risks were the main drivers.

And not helping, American manufacturers say August brought the slowest improvement in business conditions for 22 months. Markets ignored that the country was on its annual holiday shutdown. A similar survey in Europe reported stable growth. The index levels for both regions were similar.

But is was China’s data that caused investors to worry the most. Factory output is sharply lower in August, much more so than expected and its lowest level in more than six years.

The WSJ is reporting that the Chinese central bank is about to release a ‘flood of liquidity‘ – up to NZ$150 bln – by dropping its reserve requirement on banks by -0.5%. On top of that, China plans to let its main state pension fund invest in the stock market for the first time, which at the 30% level they signaled, could bring in another NZ$250 bln of ‘support’. China’s moves aren’t doing things by halves.

Watching all this with some unease will be many key central bankers who are gathering in Jackson Hole, WY for their annual conference. And at least one heavy hitter is lining up US Fed policy makers with a warning not to raise rates at their next meeting. China’s wobbles couldn’t come at a more inconvenient time for the Fed.

However, there is a view that the equity market correction is overdue, needed, and a healthy sign. We have had the longest bull run in stock market history.

In New York, the UST 10yr yield benchmark dived on Friday and is now at just 2.05%. This is its lowest level since the end of April.

The oil price is also lower and now down to US$40/barrel, with Brent crude down to US$45/barrel. There is no sign the oil glut is lifting.

The gold price is up sharply again as the gloom descends, now at US$1,160/oz.

This week may be a rough one. There is little data to be released and northern markets are still on holiday mode – fertile ground for volatility.

The New Zealand dollar stands out from all this turmoil as something of a safe haven. It starts the week firmer at 66.8 US¢, at 91.5 AU¢, and at 58.8 euro cents. The TWI-5 is at 70.9.

If you want to catch up with all the local changes on Friday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here »

Daily exchange rates

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for(i=0;i

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