Phisix 7,820: 100% of The Week’s 1.53% Advance from Marking the Close, More Tremors Rock China’s Financial Markets

Phisix 7,820: 100% of The Week’s 1.53% Advance from Marking the Close, More Tremors Rock China’s Financial Markets

As More Tremors Rock China’s Financial Markets, ASEAN Stocks Rose

Up by 1.53%, the PhiSYx was one of Asia’s outperformers.

What’s surprising has been the divergence in the performance of China and ASEAN.

Figure 1

More importantly, repeated tremors in the Chinese financial markets could be a precursor to a major financial quake.

To stem the intensifying weakness, the Chinese central bank, the People’s Bank of China (PBoC) raised abruptly to 20% the reserve requirement on foreign currency forwards which increases the cost of shorting the yuan. The yuan rebounded by 1% from the intraday lows last Friday, but still closed down by .2% this week.  The PBOC first used the reserve requirements to prevent the yuan’s slide in October 2015. However such short-term fix measure failed to arrest the yuan from falling

This week’s currency intervention signifies a followup from the previous announcement by the Chinese government to implement a USD 199 billion fiscal stimulus that had been supported by substantial liquidity injections by the PBoC (USD $73.9 billion).

Pressures in the currency market sent China’s equity markets reeling. The Shanghai Composite plummeted 4.6%.

Aside from the Philippines, ASEAN bellwethers led by Vietnam (+2.57%) Thailand (+.6%), Indonesia (+.31%) and Malaysia (+.62%) provided the cushion to the selling pressures in the region.

On the other hand, Singapore (-1.78%) and Laos (-.54%) joined the majority lower. Only eight of the 19 national bourses in the region closed up. The average weekly return for the group was a -.364%

The US-China trade war can’t explain sufficiently the ongoing strains in China’s financial markets.

Given ASEAN’s supply chain and financial linkages, the divergence in the performance in their financial assets suggests that China’s underperformance may signify a domestic issue, or that convergence may occur eventually, with either ASEAN or China closing the gap.

China and ASEAN equity markets exhibit tight correlation for the past year.

China’s Shanghai Composite (red), the Philippine Phisix (blue), and Indonesia’s JKSE (green) almost topped simultaneously in late January. However, both Indonesia and the Philippines broke their downtrend lines recently, whereas the Shanghai index seems on the path to test its July lows.

Last week, the Chinese government announced its second round of $60 billion set of retaliatory tariffs against the US. They also vowed to reciprocate to an additional $200 billion tariffs which the US government threatens to impose against them. 

Will US President Trump’s The Art of Deal, backed by intensifying domestic economic and financial pressures, push the Chinese government into the negotiation table?  Or will trade walls or barriers become a reality?

 

Figure 2

And financial tremors haven’t been limited to China. Despite offers by the Bank of Japan to up to 400 billion yen of Japanese Government Bonds (JGBs), yields of 10-year rose. The Italian equivalent has also been rising.

100% of The Week’s Advance from Marking the Close, Price Instability Haunts Philippine PMI, GDP Week

The most interesting aspect is how the PhiSYx attained its weekly position.

 

Figure 3

End session pumps accrued to a stunning 186.9 points or 2.42% of the benchmark’s value as of July 27. Since the headline index was up by 1.53%, this means that week’s entire gains had been from those engineered price fixing.

Without them, the PhiSYx may have been down. This tells us of the artificiality of prices which implies the magnitude of distortions.

Yes, three issues, AEV, SM and Ayala Corp, were responsible for the about 60% of the 1.53%.  These issues were primary beneficiaries of the massive closing session pumps of the week. Because only 2 of the top 6 issues gained market cap share, their combined share fell to 51.19%. Aboitiz Equity Ventures reported that its net income dropped 6% and 2% in the 2Q and 1H. Maybe dwindling net incomes have been seen as a good thing.

Its 17Q-Financial Statements have to be published yet.

 

Figure 4

Here is an interesting take from the Markit on July’s Philippine manufacturing conditions. The company always attempts to put up a positive spin on their surveys. But this time, there is no escape from the price instability brought about by the BSP actions, which has been aggravated by TRAIN 1.0

The seasonally adjusted Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI™) slipped from 52.9 in June to 50.9 in July. The latest reading was the lowest for five months and represented only a marginal improvement in the health of the sector…

There were signs of softening demand at the start of the third quarter. New business intakes increased at the weakest pace in the survey history despite a strong pickup in overseas sales. Growth in new export orders reached the fastest in just over one-and-a-half years. Slower sales led firms to scale back their production volumes. Output growth reached a six-month low. That said, there was anecdotal evidence that input shortages disrupted production activity.

Might slower sales come from the previous panic buying in anticipation of rising prices?

In response to softer demand, firms acquired inputs at a slower rate. Purchasing activity expanded at the weakest pace for six months which, in turn, contributed to a mild rise in input inventories. Suppliers were able to improve on their performance. Shorter delivery times were reported for the first time since March, though the gain was marginal overall.

IF input shortages disrupted production activity, why would purchasing activity expand at the weakest pace? Had these not been due to “softer demand”?  

Slack remained in the Philippines manufacturing sector during July, as evidenced by an ongoing decrease in backlogs of work. The latest decline in the level of unfinished business was the steepest for ten months. Spare capacity weighed further on hiring. Lower payroll numbers were registered for a second straight month in July. However, voluntary leavers were commonly cited as a reason.

So manufacturing shed jobs despite the recent spurt.

Inflationary pressures in the sector remained marked. Higher prices for raw materials, such as diesel, plasticsand rice, a weaker peso and effects of the TRAIN regulations all contributed to input cost inflation, which remained well above that seen in recent years. Greater cost burdens led firms to raise selling prices further in July. While still elevated, business expectations relating to output in the year ahead fell to the lowest in the survey history.Where optimism was recorded, new products, higher sales forecasts, solid construction activity, planned business expansions, and increased marketing efforts were all reported as reasons

Has the law of demand (as the price of the goods increased, quantity demanded decreases) been influential in the softening of sales and output? Have the clients of these firms overstocked in response to previous anticipations of higher prices?

Has reality begun to pervade on the previous bullishness or optimism of manufacturers?

Have actions of the manufacturers contributed to slowing M3?

Surveys are mostly driven by perceptions, sentiments, and egos than by real events.

In closing, aside from the BSP, 2Q GDP will be announced on August 9.

Ever since 2015, pre-GDP week typically experiences wild swings.

What makes 2Q GDP interesting is President Duterte’s June comment that the “economy is in the doldrums”. Of course, the statistics is economics crowd like Moody’s projects 2Q GDP lower at 6.6%. The PSYEi 30 two-week return of 5.61% suggests that 2Q GDP may outperform. Have these been speculation bolstered by insider info?

GDP has been pillared mostly by surveys which serve as inputs to econometric models. And that’s the reason for the deluge of positive spins.

Has the recent spurt in inflation caused a dampening in sentiment that may affect GDP?