Most investors are primarily oriented toward return, how much they can make, and pay little attention to risk, how much they can lose—Seth Klarman
In this brief issue:
PSEi 30 Plummets on Foreign Selling Amidst Low Volume; Intensifying Global Liquidity, Collateral, and Counterparty issues
I. PSEi 30 Plummets on Foreign Selling Amidst Low Volume
II. Intensifying Global Liquidity, Collateral, Counterparty issues have Magnified Liquidations and Volatility
PSEi 30 Plummets on Foreign Selling Amidst Low Volume, Intensifying Global Liquidity, Collateral, Counterparty issues
I. PSEi 30 Plummets on Foreign Selling Amidst Low Volume
From our outlook a week ago…(bold original)
Thus, the sustained deterioration of market liquidity magnifies the risks of downside volatilities.
Stagflation Ahoy! How "Limited" is the Impact of the Ukraine War on the Domestic Economy?
April 24, 2022
Despite the heroics of pre-closing interventions, the PSEi 30 plunged 3.82% this week, the worst in 2022, pulling down its YTD performance to -5.5%.
And down by 6.56%, the April 2022 loss represented the largest since 2008.
Figure 1
Weekly foreign outflows accounted for Php 1.46 billion. Meanwhile, the share of foreign transactions was little change week on week at 46.54%. Nevertheless, foreign participation has been on an uptrend since July 2021. But they remain net sellers.
Figure 2
Simply put, foreign dumping of domestic equities in the face of low volume resulted in the biggest weekly deficit of the year.
This week’s selloff slightly boosted trading turnover.
Foreign selling accelerated in March. While the PSE recorded an outflow of Php 10.693 billion, the BSP reported an outflow of USD 305 million.
In the BSP report, the primary channel of the exit of hot money was the PSE, while a less significant portion came from the treasury markets.
Nonetheless, the PSEi 30 slid to August 2021 levels, confirming the double break in the uptrend from March 2020 when the BSP mounted a rescue of the financial system.
Further, bearish patterns could compound selling pressures. First, a rounding top seems to plague the index. Next, the week's selloff cements the drift to a death cross (200-day moving average rise above the 50-day moving average).
Yes, an oversold bounce is due, but one may use such opportunities to generate liquidity.
II. Intensifying Global Liquidity, Collateral, Counterparty issues have Magnified Liquidations and Volatility
Liquidity, collateral, and counterparty issues have magnified liquidations and volatility worldwide.
Market strains are emerging in the nook and crannies of the global financial markets, particularly in credit markets, credit spreads, currencies to the stock markets.
The pain appears to be spreading.
Figure 3
In the currency market, the USD continues to firm up. (Figure 3 topmost pane)
And it is not just against the euro, but the yen and the yuan (as noted below) are likewise under severe pressure.
The Chinese yuan registered its sharpest monthly drop. (Figure 3, middle window)
Surging US repo fails have accompanied the plunge of the Japanese yen. (Figure 3, lowest pane)
Pressure on collateral and counterparties has become apparent.
Figure 4
The ongoing liquidity drain has been pushing up the yield spread of US junk bonds while high-grade corporate yields in Europe have surged to the pandemic highs of 2020. (Figure 4, upper and middle windows)
Figure 5
Surging yields or plummeting global bond markets have amplified volatility. (Figure 5, upper window)
The MOVE index continues to climb, signaling further strains on the bond markets. (Figure 4, lowest pane)
Soaring Credit Default Swaps (CDS) continues to hound the US S&P. (Figure 5, lower window)
From Credit Bubble Bulletin’s Doug Noland, April 30: "Asia Credit default swap (CDS) prices increased notably this week and during April. For the month, the Philippines CDS rose 32 bps (to 111bps), Vietnam 25 bps (137bps), Malaysia 25 bps (92 bps), India 22 bps (127bps), Indonesia 21 bps (106bps), and South Korea 12 bps (41bps)".
Default risks are rising globally.
Unlike in the recent past, global central banks can’t print the scarcities and shortages brought about by the supply shock.
Figure 6
Fertilizer shortages have spread to the US, which means lower output ahead. The risks of a global food crisis mount.
The CEO of Goya Foods affirms our view. Real Clear Politics, April 26: "Bob Unanue, the CEO of Goya foods, told FNC's Maria Bartiromo on Tuesday that inflation price increases and actual shortages of food are likely around the world this year."
The Indonesian government confirmed its export ban on palm oil, which translates to the diffusion of shortages of many items globally.
Inquirer, April 25: Indonesia’s plan to ban palm oil exports will deal a blow to the world’s top food and consumer products companies including Unilever, Procter & Gamble, and Nestle. Indonesia counts for more than half of the global supply of the edible oil, which is used in everything from cakes, chocolate, margarine and frying fats to cosmetics, soap, shampoo and cleaning products.
Deepening protectionism will only intensify supply disruptions.
Because of power shortages, Pakistan and India imposed rolling brownouts amidst sweltering heat waves.
The feedback loop between the 'real' developments and the financial markets can only escalate.
Batten down the hatches.
Yours in liberty,
The Prudent Investor Newsletters
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Nota Bene: The newsletter intends to apprise readers of the market conditions based on the information available at the time of the items’ writing, whose accuracy and timeliness of the issues concerned are subject to change without prior notice. Solicitation to trade is neither intended by the contents. In the meantime, the discussion of occasional positioning on particular issues are opinions of this author.
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