Tuesday, August 20, 2013

ASEAN Meltdown: Indonesia’s JCI in Bear Market, Thailand’s SET and Malaysia’s KLSE Clobbered

When I wrote, “And if rising UST yields have indeed been reflecting on growing scarcity of the quantity of US dollar relative to her non-reserve currency trading partners such as ASEAN, then higher yields would likewise imply pressure on the currencies, and similarly but not contemporaneous, on prices of financial assets…”, I meant that the impact from rising bond yields or interest rates will not be the same for each markets, in terms of timing and scale. This also means that the turbulence emanating from the raging bond vigilantes will intensify and spread.


Such dynamic seem to hit not only ASEAN, but the rest of Asia. The region’s markets had mostly been in red today. 


With today’s 3.21% rout, the Indonesia’s JCI has technically entered the bear market (20% threshold) territory.  Among the ASEAN 4, the JCI follows the Philippine Phisix as having touched the bear market zone. The Philippines reached the bear market last June but has bounced back.

And what seems as difference between JCI and the Phisix is that in the Philippines there has been a massive denial by the public of the existence of the bear market out of the devotion to "this time is different" mantra


Meanwhile, the JCI fell by as much as 5.5% intraday before bouncing back.


Despite the JCI’s substantial intraday recovery from the troughs, the Indonesian currency the rupiah (USD IDR) slumped and closed at the lowest level of the day.

Mainstream media attempts to shift the blame on Indonesia’s plight to the surging current account deficits. The reality is that such deficits are only symptoms of Indonesia’s systemic bubbles which appears to be imploding, aggravated by the bond vigilantes.


Thailand’s SET also closed sharply lower, but not as much as yesterday’s 3.27% dive.

Like the JCI, the SET gradually chipped off the early losses which peaked at about 3% intraday.

Thailand reportedly has fallen into a recession during the second quarter.


The currency the baht (USD BHT) also closed lower today


Malaysia’s KLCI which seemed as the most resilient among the four ASEAN giants, appears to have finally been affected by the contagion. The KLCI suffered substantial 1.85% loss today.


Malaysia's currency the ringgit (USD-MYR) has initially been sold off but recovered by the late session to close the day marginally lower.

Meanwhile I read a belated news report where the influential association (cartel??) of financial institutions, the Institute of International Finance (IIF) expects the Philippine central bank to tighten soon in order to “keep” the economy from “overheating”. Overheating is a euphemism for credit bubble.

The report quoted a BSP official warning that “a protracted period of high M3 growth may pose risks to the Philippine economy if it leads to higher inflation.”

First this looks like part of the signaling channel used by central banks to condition the market’s expectations.

Next, the BSP, on its own, will not tighten. Instead the market has already been tightening. Bank loans have been slowing down from the start of the year, which extrapolates to a peaking of M3, as I previously pointed out. The diminishing pace of bank lending will reflect on the future data of monetary growth conditions that will also be reflected as slower statistical economic growth. The BSP thus will react to the market rather than influence them

Such slowdown has already been manifested by the Philippine financial markets. And rising US bond yields has only been exacerbating these conditions. 


The Philippine peso (USD-Php) was significantly lower in the global spot currency markets, despite today’s extended flood and weather related suspension of school and offices.

It would be interesting to see how the Phisix will react  during the resumption of trade this Thursday, especially if ASEAN and global markets continue to bleed. Will the Philippines be lucky enough to escape the two day carnage?

Although perhaps given the oversold conditions of the equity markets of Indonesia and Thailand, a relief rally could be expected tomorrow or soon, possibly underpinned by a sharp rally in 10 year US Treasury notes (or steep fall in yields) as of this writing.

Meanwhile except for Indonesia, ASEAN bonds has been minimally affected by the current rout thus far. But it would naïve to believe that such conditions will remain. In the Philippines, media and BSP officials has already been insinuating or implicitly conditioning the public of a prospective “tightening”. This means bonds are the next line in the bond vigilante instigated temblor.

Caveat emptor.

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