Phisix and the SET: Why Talking Up the Embattled Stock Markets Won’t Work

Desperate stock market authorities from the Philippines and Thailand gave an advice today to panicking stock markets: CHILL.

From Bloomberg:

Stock exchanges in the Philippines and Thailand have moved to soothe investors after speculation the U.S. Federal Reserve may scale back bond purchases prompted selloffs by overseas investors.

Stock Exchange of Thailand President Charamporn Jotikasthira today urged investors not to panic, saying economic and corporate earnings growth in Southeast Asia’s second-biggest economy remains strong. The benchmark SET Index dropped to two-month low. Philippine Stock Exchange President Hans Sicat described the selloff as an “extreme overreaction.”

The Philippines benchmark index has slumped 11 percent and the Thai gauge 8.4 percent since May 22, when Fed Chairman Ben S. Bernanke said policy makers could consider reducing the pace of monetary stimulus if the nation’s labor market improves. Overseas investors have sold a net $414 million of Thai stocks and $147 million of Philippine shares this month.

“Foreign net selling is an extreme overreaction to Bernanke’s” outlook on possible stimulus cuts, Sicat said in a televised interview with ABS-CBN News today. “Technical corrections tend to be buying opportunities for others who are more conservative.”

Authorities from both former sizzling hot stock markets hardly provided sufficient explanations as to the relationship between the so-called proposed Bernanke’s stimulus cuts vis-à-vis the meltdown, and why the current market paroxysm has not been justified. 

A reduction of stimulus, and not a cessation, simply means of a partial tightening of monetary environment. This could be suggestive of the advent of high interest rate regime. 

And the brutal market reactions reveals of the extent of sensitivity to interest rate changes due to the degree of leverage employed and established around the Fed’s and local central banking "stimulus".

Simply said, financial markets have been deeply addicted to central banking steroids. Thus the recent stock market rout may be analogized as "withdrawal syndromes"

While it may be a coincidence that the emerging markets, represented by the Philippines (PCOMP-yellow) and Thailand (SET-green), turned the corner (dark blue vertical line) as shown in the above chart from Bloomberg since the May 22nd Bernanke spiel, in reality interest rates as impliedly measured by the US 10 year yields (USGG10YR-orange)  has already been in a sharp ascent since the early days of May. This means that Bernanke's babbles seem as trying to realign their policies to match or to reflect on the actions of the bond markets. 

Of course when authorities talk about strong “economic and corporate earnings” they are referring to the recent past events which blossomed under a low interest rate environment. The prospects of higher interest rates essentially changes this, which has been the reason for such violent response.

Finally, words of appeasement from authorities like the above sends shivers down my spine. That’s because they resonate with the responses made by authorities during a somewhat similar crash environment 

Here is a some quotes from the October 29, 1929 stock market “Black Tuesday” crash that ushered in the Great Depression:

Sept. 1929: "There is no cause to worry. The high tide of prosperity will continue." Andrew W. Mellon, Secretary of the Treasury

Oct. 14, 1929: "Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board". New York Times

January 21, 1930: "Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said that reports to the Cabinet showed the tide of employment had changed in the right direction." News dispatch from Washington

May 1, 1930: "While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States-that is prosperity." President Hoover

June 29, 1930: "The worst is over without a doubt." James J. Davis Secretary of Labor.

Sept. 12, 1930: "We have hit bottom and are on the upswing" James J. Davis Secretary of Labor.

What I am saying is that markets ultimately determine whether the interim trend and price levels are justified or not. 

Media’s appeal to authority and the subsequent denials made by authorities will hardly wish away any perceived problems the markets sees, which are currently being ventilated through the vehement feedback as expressed via steep price declines.

Following successive sessions of severe drubbing, the vastly oversold Phisix turned from a 164 point intraday opening decline to close higher by .78% or 58.21 points today (chart from technistock.com ).

The sharp rebound has little to do with pitching up of the marketplace, but about knee jerk responses to extreme technical conditions. 

Thailand’s SET slumped 2.13% today.