Loosening Correlations Between Asia and the US Markets

``Large diversification flows — other than the currency-rebalancing exercise undergone in some foreign central banks — have been powerful undercurrents in the currency world, forcing the dollar and the JPY below their values that are consistent with the economic fundamentals. We believe that, in the coming years, we will witness a similar trend in large EM economies that have accumulated enough wealth and attained adequate confidence and knowledge about the international capital markets. In other words, while many of these EM economies have been acquiring foreign assets through their central banks and SWFs, we believe that the private sectors of these economies will be major exporters of capital to both the developed markets and to other EM economies.”-Stephen Jen, Morgan Stanley

Over the interim, the US markets could go either way. This means the same with global equity markets including the Philippine Phisix.

Figure 5: Chartoftheday.com: Pre-Election Cycle

On the bear side, the continued dislocations in the credit market and renewed selling pressures in the US equity markets aside from deflationary signals across asset markets are likely the risks to reckon with as the market awaits action from US Monetary authorities.

We are inclined to believe that any material threat to US markets would likely manifest itself by next year.

On the other hand, the bullish premise is that major US equity benchmarks appear to be technically oversold and could rebound soon, before ascertaining its next major move. Aside, the seasonal Presidential Pre-Election cycle in the US could also be of help to the bulls as shown in Figure 5.

So far, the rendition of the average Pre-election cycle by the US markets today has been quite in precision as shown by chartoftheday.com. Of course, we understand that past performance does not guarantee future outcomes, which is why we think markets can go either way.

Figure 6: Stockcharts.com: Phsix-US-Asia

In figure 6, the Philippine Phisix (main window) has shown a remarkable correlation with the US S &P 500 (chart below main window) anew, where both indices peaked out almost synchronically (see vertical blue line).

The basic difference is that of the degree of the reaction. Last August, the S & P 500 fell by about 10% from its peak (based on closing prices) and the Phisix reacted with extraordinary haste and intensity, the latter crashed by some 24% to 2,884 (see blue circles).

Today, the S & P is about 8% down from the October acme whereas the Phisix is stunningly down by about the same proportion as the US benchmark!

And to consider, market internals tell us that foreigners have been in a heavy retreat for 5 successive weeks (by about Php 11 billion!), which means the market has been bolstered and cushioned by the local investors! Foreign money accounted for a net selling of Php 3 billion this week. This significant support from domestic investors is a fresh development in this advance cycle which began in 2003, and became evident only during this July’s selloffs. We are inclined to believe that the Peso’s strength has a hand in this.

In addition, one could notice that Asian markets have belatedly responded to the US decline, as shown by the arrows in the Dow Jones Asia ex-Japan Index (middle pane) and the Fidelity Southeast Asia Fund (lowest pane), which suggests that previous tight correlations have now eased or relaxed.

So while it is true that US markets have still material influence to Asian markets we are witnessing some loosening correlations which if the pattern sustains, eventually should lead to a decoupling.