Phisix, Peso Driven by Fedwatch Plays; The Gallery Experience

``Globalization is defined as integration of economic activities, via markets. The driving forces are technological and policy changes--falling cost of transport and communications and greater reliance on market forces.” Martin Wolf, columnist, Financial Times

Morgan Stanley’s Stephen Jen recently wrote ``the market’s fixation on the Fed is justified, because it is the Fed’s action and posture that will dictate the global liquidity cycle and investor risk-taking attitude.” If global markets are indeed following the US Fed as a gauge on the liquidity cycle, then reckoning on the probability side, it is likely that the US Federal Reserve is at the near end or the peak of its tightening phase (for the moment).

So far, the domestic financial markets appear to buttress my view, that a pause or a cut for that matter, would restore the US dollar diversification investing theme. As I mentioned too in the past editions too, the rally in the gold market, another barometer of the anti-US dollar trade, appears to correlate with the performances of emerging markets bourses. For the week, as gold jumped 3.05% to $634.8 per oz, the US dollar denominated sovereign ROPs rallied, the Peso firmed by a hefty 1.43% to Php 52.35, while the Phisix gained a considerable 3.64%.

Figure 4: Phisix (candlestick) and the USD/PESO (blue line)

As you can see in Figure 4, the Philippine Peso has shown quite a strong association with the performance of the Phisix, such that a rising Peso positively correlates with an advancing Phisix (red arrows) and vice versa. This suggests that portfolio flows into the domestic financial markets could have at the margins contributed to the rising Peso.

While the Phisix accounted for foreign money outflows during the last four weeks, this has reversed as of last week and would probably see continued inflows if global investors persist on the Fedwatch plays. Although Monday could probably start off weak following the lead of Wall Street’s conspicuous decline last Friday, which could possibly be a buying window.

While risks factors arising from the latest selloffs are still present, I remain cautiously bullish with the Phisix, on the account of the US dollar diversification theme and a bullish outlook in gold, and would closely watch the bond and gold markets for signals on the possibility of the re-emergence of the risk reduction trade.

Finally I was at the gallery of the PSE in Makati last week, the quintessential casino hall of the stockmarket, where the ambiance was filled with all sorts of rumors/gossip based activities and the proliferation of mental shortcuts which can be heard from most of the participants, and was delighted to hear that retail investors have now learned how to follow on the gold markets with respect to the mines. For a long period (2003-2005), if you recall, I have decried on the public’s indifference to a rising gold vis-à-vis the mining sector even when the Philippines sits on one of the largest reserves in the world. As said in the past, psychological evolutions take time to form or shape, and as the gold and commodities markets resume their ascent they will further diffuse into the public’s mindset until the great upside capitulation comes (time to get out!). As always, it has been an unfolding cycle.

Post script, I continue to shun the trading floor and the gallery or stock forums due to the adverse experience in my second venture into stockmarket investing in the mid 90s. As a gullible novice then, I heeded on tips from group chatters which got me badly burned figuratively or my portfolio mauled, aggravated by margin trading, that I almost literally leapt out of the 12^th floor of the Tektite building (formerly the trading floor) out of despair and swore off the touching the markets then…until of course, I met my mentor who taught me the prudent way. How times have changed.