Indonesian Stocks Sinks, Chinese Stocks Soar and More on the Peso and the BSP ‘Tightening’

As noted here, like the Philippines, Indonesian stocks have been in a frenzied mania. 

In mid March, reports where the populist leader—Jakarta Governor Joko Widodo announced that he would be running for presidency—sent the JCI to a one day boom of 3.23%. Despite a interim few obstacles, Indonesian stocks charged to approach the pre-taper highs of May.

Today, what seems as a ‘one way trade’ embedded in Indonesia’s Wall Street’s expectations may have hit a roadblock as the man on the streets have voted in a different direction and this sparked a mini-selloff.

From Jakarta Globe:

Indonesian stocks fell on Thursday — sending the main index to its biggest decline in seven months — after early legislative results showed that presidential candidate Joko Widodo’s party may not have enough seats to secure its own pick and would have to form a coalition, disappointing investors who hoped for an easy nomination…

Joko’s Indonesian Democratic Party of Struggle (PDI-P) managed to get about 19 percent of the votes, as shown by most quick count polls in Wednesday’s elections, but short of the 25 percent needed to secure its own presidential candidate. PDI-P collected 19.64 percent of the popular vote, according to a survey by LSN. Official results are scheduled to be released on May 7-9.

The JCI tanked by 3.16% today

The Indonesian currency ,the rupiah, was also hit. The USD-rupiah gained by .61%.

I doubt if today’s steep decline may turnout to be an inflection point. Like in the Philippines, the Indonesia’s Wall Street will likely find other justifications to “buy the dip”.

Stocks have now become a one way trade. The bigger the risks, the more frenetic the upside response have been. 

For instance, Indonesia whom almost tipped into a crisis, have instead incited violent rallies in bonds, stocks and the currency at a pace seemingly beyond the pre-taper levels.

Nonetheless the importance of today’s event has been the revelation of a vital disconnect between Indonesia’s financial markets and her version of the main street.

And such divergence or parallel universes can be seen not only in Indonesia, but in Chinese stocks as well. 

Despite the news of a sharp fall of external trade in March for both exports –6.6% and imports –11.3%, signifying a deepening slowdown in the Chinese economy (chart from Zero Hedge)…

…the Shanghai Composite Index surged by 1.38% today.

Why?

Because supposedly of a proposed cross listing…

From Reuters: 

Hong Kong shares closed at their highest level in more than three months on Thursday, lifted by news that Beijing's securities regulator will allow cross-border stock investment between Hong Kong and Shanghai.

The announcement also boosted mainland indexes, with the Shanghai composite index reaching a two-month high…

The new rules will allow mainland investors to trade shares in designated companies listed in Hong Kong, and at the same time let Hong Kong investors buy shares in Shanghai-listed firms.

Cross listings are indeed a positive signal over the LONG term, but there are considerable short term activities that can serve as impediments to the long term.

One example, another prospective default. Just the other day, a small polyester yarn manufacturer in Zhejiang, the Zhejiang Huatesi Polymer Technical Co Ltd filed for bankruptcy and thus heightening the risks of another bond default. (Reuters). Week in week out, we get more reports of troubled Chinese companies or financial institutions.

As one would note the feedback loop between credit woes and economic slowdown has been intensifying. Again more signs of parallel universes. And again more interim potential sources for economic or financial black swans which can upend any long term gains from reforms.

The same divergence can be said of the rally in the Peso today. 

I wrote earlier today that  the BSP has been intervening and that exports as driver of the rallying peso has been largely misguided.

And I belatedly read a media report where the BSP chief supposedly hinted at 'tightening'. The BSP governor said that they are “mindful of strong domestic liquidity and credit growth that could heighten financial stability risks”. [As a side note, the same report shows how demand morphs into a black hole when discussing inflation]

Yet the market’s response has been divergent. While the peso rallied strongly partly perhaps to such proposed actions, stocks ignored the threats and even got bidded higher, and Philippine treasuries seemed indifferent.

So soaring stocks— mostly publicly listed companies which have been acquiring alot of debt— from the BSP’s signaling only heightened financial stability risks. What do you call stocks trading at 30-60 PERs and PBVs at 3 and above?

I have argued lengthily why so far this has just been a rhetoric. That’s because the so-called magical transformation of the Philippine economy has all been about the domestic markets response to distortive policies which has promoted 'aggregate demand' that went 'specific' demand or select supply side credit driven demand. In short, a credit fueled demand boom or an inflationary boom.

And since July, the BSP governor has sporadically attempted at influencing the markets by threatening to tighten—  unfortunately a tightening that has hardly occurred except for superficial or symbolical actions like the thinly raising of the reserve requirements.

And market divergences are a natural consequence to discounting such a move.