``Every restriction on the freedom of entry into a trade reduces the security of all those outside it.” Friedrich A. Hayek, Road To Serfdom
It didn’t take long for our expectations to happen.
Last week we argued that while the local mainstream media and the public have been overly fixated on politics, which they presumed as THE overwhelming force that would drive the domestic markets, external forces seemed to have a greater influence[1].
In contrast to the local mainstream mindset where many have argued for “election risks” and henceforth suggested a “sell” we have been taking the opposite stance, the PESO and the PHISIX have, in colloquial, been “rarin’ to go”-ergo a BUY!
And true enough, the first phase of the impact of our external influence theory have manifested in the markets as the Philippine PESO hit a 19 month high!
And local media appears lost for explanations!
One outfit imputed the Peso’s rise to the recent actions of the US Federal Reserve. Another pointed to a firming US recovery. A foreign report alluded to an alleged arbitrage between offshore and onshore funds and finally the Bangko Sentral ng Pilipinas (BSP) reportedly said that the strengthening Peso has been due to “country’s higher export earnings, in spite of jitters about the coming elections and sovereign debt concerns in some European countries”[2].
My reply: DUH!
Since the Peso’s gain have been in a winning streak, instead of just an outsized aberration or anomaly as signified by a one week jump, hardly any of these explanations “fit” the actuations from which underpins the true dynamics of a buoyant Peso.
Say for example, if a strong peso had been a result of an arbitrage, then the impact is likely to be a short-term reaction. But why a 4 straight week of gains?
In addition, how can ‘jitters about elections’ explain the gains of export earnings? If global consumers see the output from local producers as being ‘affected’ or disrupted by elections, then the former would have probably coursed their transactions with producers of some other nations than from the Philippines. But has this been so? Based on the reply of the BSP official, the answer is an obvious NO! The official’s reply reveals of the apparent self-contradiction or cognitive dissonance.
So how can we SQUARE election jitters with, not only advances in the Peso, but also of export earnings?
Moreover, if these have all been about the US, then an outperformance by the US relative to Asia or the Philippines should translate to a gain in the US dollar vis-a-vis the Peso. What a dichotomy!
Available bias is an intuitive attribution of activities in the marketplace to current events. Unfortunately, market signals appear to have completely diverged from popular sentiment to even warrant the use of such behavioural lapse.
In short, popular sentiment has been so confounded. Yet media, and even officials, obstinately insist on the claptraps of false linkages!
In essence, popular sentiment is all about SENSATIONALISM!
Commons sense is, thus, sacrificed for irrational passion.
To further exacerbate the mainstream anguish of cognitive dissonance, the Philippine equity benchmark, the Phisix, added another week of gains to score its SIXTH straight.
The Phisix is just about [less than] 1% away from a breakaway run.
And if we earlier exhibited how the Peso tracked Asian currencies, then this week’s first chart features Asian equities (see Figure 1)
Figure 1: Bloomberg: ASEAN and the MSCI Asia Pacific Index
At the upper window is the performance of our main ASEAN neighbours.
One would note that Thailand (SETI-orange) and Indonesia (JCI-red) appear to be on a turbocharged performance following recent resistance breakouts.
Singapore [FSSTI-yellow] echoes the price activities or the chart of the Phisix [not included] and appears poised to test on the resistance levels set last January.
Only Malaysia [KLSI-green], which also broke out earlier, seemed to have lost momentum. While bears may take the Malaysian case to argue that this could serve as an indicator for the rest of the region, in my opinion, this isn’t likely so.
Why?
Because the actions of the MSCI Asia Pacific index, a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed and emerging markets in the Pacific region. As of June 2007, the MSCI AC Pacific Free Index consisted of the following 12 developed and emerging market countries: Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Taiwan, and Thailand[3], suggest that Malaysia is an exception rather than the rule.
The MSCI, as exhibited in the lower window, replicates the actions of the Phisix and Singapore and appears in position for the same momentum as we have seen in Thailand, and Indonesia and somewhat in Malaysia.
In short, the overall story that can be gleaned from the region’s equity markets today is one of RISING and not falling markets!
Besides, the foundering momentum in Malaysia may not last long, given the constructive general ambiance, unless of course there is an untoward quirk which we have yet to identify.
Finally, only one article seemed to have referenced on what truly mattered most, a Chinese yuan/renmimbi revaluation as we will discuss below.
In essence, two factors, one structural and one cyclical, will drive the global financial markets over the medium to long term; specifically, the record steep yield curves and the prospects of a rising Chinese yuan.
[1] see Philippine Markets And Elections: What People Do Against What People Say
[2] Manila Times, March 13, 2010 Foreign money in RP financial assets keeps flowing
[3] MSCI Barra, Index Definitions
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