Philippine Bonds: Marginal Improvements for the Week, Deflation Signs in the Construction Industry!

It will be a truncated work week due to the Pope’s visit to the Philippines.

The Philippine bond markets closed the week with marginal improvements.

This comes in the light of the recent $ 2 billion fund raising by the Philippine government in the international bond markets as discussed last weekend.

Given the new funds injected, signs of liquidity strains should have materially eased.

Well it hasn’t. Maybe in the coming weeks but so far the pace of improvements hasn’t been substantial.

For now, only yields of 3 month bills have markedly eased. But it remains at June 2013 levels. Yields of 6 months and 1 year has moderated marginally.

Interestingly, not only has the inversion between yields the 5 year and 4 year deepened, the 5 year has also inverted with its 3 year treasury counterpart!!!

In short, 3 year yields have closed the week higher than 5 year. Why???

Overall, a glimpse at the spreads between 10 and 20 year vis-à-vis the shorter maturities, namely 6 months, 1 year and 2 years have hardly made any significant change this week.

Yet if we compare the effects of the latest borrowing by neighbor Indonesia which also raised $ 4 billion last week, the rally in Philippine bonds at the long end has been dwarfed by the Indonesian counterpart whether seen in both the yields of 10 or 20 year bonds (charts from investing.com)

All these are based on today’s actions.

The rally in Indonesian bonds is the scale of what I initially expected to happen here.

So everything hunky dory for Philippine bonds eh?

I have said this weekend that deflation has landed on Philippine shores as seen via crashing M3, negative CPI, the flattening of the yield curve and the spike in CDS.

Well to add to this, here is a more striking development: wholesale prices of construction materials in December has CONTRACTED!

Let me quote the National Statistics Office: (bold mine)

Compared to a year ago level, the Construction Materials Wholesale Price Index (CMWPI) in the National Capital Region (NCR) posted a negative rate of 0.1 percent in December. Last month it was recorded at 0.8 percent and in December 2013, 2.4 percent. The downtrend was due to 14.9 percent decline in fuels and lubricants index. Slower annual increments were also noted in the indices of cement at 2.3 percent and tileworks, 2.7 percent. The rest of the commodity groups either had higher annual mark-ups or retained their last month’s rates with the indices of asphalt and machinery and equipment rental still registering a zero growth...

On a monthly basis, the wholesale prices of selected construction materials in NCR further went down by 0.8 percent in December. This was attributed to the decreases registered in the indices of fuels and lubricants at -7.0 percent and cement, -0.2 percent. Higher monthly growths were, however, seen in the indices of hardware and reinforcing steel at 0.2 percent; plywood, 0.5 percent; plumbing fixtures and accessories, 0.6 percent; and PVC pipes, 0.1 percent. Movements in the other commodity groups either remained at their last month’s rates or had a zero growth. A series of price rollbacks was observed in gasoline, diesel and fuel oil during the month. Likewise, prices of cement were on the downtrend. On the other hand, higher prices were noticed in plywood, steel bars, PVC pipes, plumbing fixtures and accessories like faucet, kitchen sink and angle valves.

One can partly impute to construction deflation to crashing oil prices, but the declining prices of cement, machinery and equipment rentals and the others have likely been more about demand. 

In addition, rising prices of plumbing fixtures and other accessories could be about the falling peso, rather than demand based increases.

So why the collapse in construction material prices? Has there been a deluge of imports or production by domestic supply which has not been met by demand? Or has this been an essentially demand slowdown problem?

If this has been a manifestation of diminished demand, then this should be portentous for statistical GDP for the 4Q. 

Just to remind you of the contribution of construction industry on 3Q 2014 statistical GDP

From the expenditure side, based on NSCB data, construction grew 12.3% in 3Q 2014 year on year. Construction accounted for 9% of 3Q GDP.

From the industry side, construction expanded 11.94% in 3Q 2014 with the share of the industry to overall GDP at 5.83%.

The 5.3% 3Q GDP owes largely to construction and finance activities as discussed here.

From the expenditure perspective, if statistical CPI on a month-on-month basis, which has SHRANK for two successive months, could most likely be indicative of decreased consumption activities by domestic households (compounded by falling oil prices), if exports hardly picked up and where its gains has been offset by import growth (X-M) and if the above signifies a manifestation of a slowdown in construction, then where will 4Q statistical GDP come from?

It looks as if a big negative surprise for 4Q statistical GDP is in store for the high growth one way street looking consensus. We will know by January 29th.

So what has today’s orgasmic bidding spree to push the Phisix beyond 7,500 all about? The Philippine economy has reached a state of utopia where risks have all vanished?

ASEAN Credit Default Swap (CDS) Spreads Spike!

Credit default Swaps (CDS) are the cost to insure debt from default risks.

It appears that ASEAN’s CDS spreads has spiked this week. In other words, market’s perception of ASEAN default risks has sharply risen (all charts below from Deutsche Bank—based on recovery rate of 40%).

Philippine CDS fast approaches the October highs! Yields of 10 year peso government bonds climbed 17.6 bps week-on-week. More importantly, short term yields have been soaring for three successive weeks. Has the dramatically flattening yield curve been the reason behind the CDS ramp? Or has this been due to a EM contagion or a combo?

Malaysian CDS passed October levels and now swiftly nears the January 2014 highs, or then, during the climax of the EM taper tantrum turmoil. Yields of Malaysian 10 ringgit bonds marginally slipped this week, but still drifts at the highs of the 2010 levels

Has current pressures in Malaysian’s currency and stock markets functioned as the trigger? 

Indonesia CDS have reached October highs. Yields of 10 year rupiah bonds closed the week marginally changed but had a short bout of sharp intraweek volatility. 10 Year yields are just off the January taper tantrum highs. Has the CDS spike been perhaps due to the record low of the rupiah and or contagion?

Thailand CDS has also passed October 2014 highs, but has partly backed off the past days. Yields of 10 year baht climbed by some 10 bps this week. However current yield levels remain at the lows equivalent to 2010 levels.

Aside from the baht drifting at January levels, Thai’s stock markets just suffered a stunning intraday crash last Monday which it had mostly recovered this week.

If debt markets continues to price in higher ASEAN default risks, will this be positive for stocks?  Those January 2014 CDS peaks coincided with the stock market lows during the EM taper tantrum that commenced in May 2013. Will this time be different?

We truly live in interesting times!

ASEAN Financial Markets Convulses on Janet’s Yellen’s FOMC Debut

At her inaugural news conference as the head of the US central bank, the US Federal Reserve, Ms. Janet Yellen uttered something that has largely been considered a “taboo” in the financial world.

What did she say? From Reuters:

The U.S. Federal Reserve will probably end its massive bond-buying program this fall, and could start raising interest rates around six months later, Fed Chair Janet Yellen said on Wednesday, in a comment which sent stocks and bonds tumbling…

Ms. Yellen's market shaking statement:

"I -- I, you know, this is the kind of term it's hard to define, but, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends -- what the statement is saying is it depends what conditions are like."

Why should the higher interest rates suffer the markets? Well the simple answer is DEBT.

So how did ASEAN financial markets react?

Let us first check on Asia’s currency markets.

The Bloomberg data shows that the US dollar soared by over .5% against 5 Asian currencies, the Indonesian rupiah (1.16%), Indian rupee (+.62%), the Philippine Peso (+.58%), the Chinese yuan (+.55%) and the Korean won (+.52%). The US dollar even firmed against the New Zealand and Aussie dollars. 

It was an all US dollar show for today for the rest of Asia.

For the Peso, the USD-Peso has now breached the 45 level (45.1) and is within striking distance at the 52-week high of 45.48. Today’s sharp losses by the Peso essentially piggybacks on the declines of the early week.

Now let us move to the bonds.

ASEAN bonds crumbled today. This has been led by…guess who?…the Philippines whose yields has spiked by 31.3 bps!

Yields of 10 year Philippine bonds have now surpassed the July 2013 “taper tremor” highs.

Didn’t Moody’s just recently blessed the Philippines saying the she won’t be hurt by a sudden stop?  Then why today’s violent  reaction?

Most Asian stocks as shown by the Bloomberg had been hit pretty hard. The Nikkei plunged 1.65%, the Shanghai Index 1.4%, Australia’s S&P/ASX 200 1.15% and Taiwan 1.06%.

Except of Indonesia’s JKSE, ASEAN stocks were the least relatively damaged. 

Indonesia’s JKSE was hammered down by 2.54%. Today's loss which adds to this week’s earlier declines has nearly erased Friday’s dramatic 3.23% advance. 

ASEAN’s stock market still remains very complacent. So far stock markets of Malaysia, Philippines and Thailand appear to be implying that falling currencies and higher yields won’t impact earnings. 

They seem to also forget that once monetary policies of US and other developed economies tightens, emerging markets including emerging Asia will need to align with them. And such policy adjustments will expose on her unsustainable debt levels accrued during zero bound days. Thus the likelihood of more market earthquakes as I previously discussed.

Well good luck to the staunch worshipers of bubbles who believe that they are immune to the growing variety of risks.

 

Perhaps Ben Bernanke could be asking Asian-ASEAN markets: "Miss me yet?" (hat tip zero hedge)

Emerging Market $2 trillion Carry Trade: The Pig in the Python

Last week, I reasoned that changes in US monetary policies and changes in the interest rate signals in the US will naturally force adjustments based on “yield spreads” which eventually will be transmitted (whether you like it or not) as emerging market monetary policies. I stated that such alterations will expose (bold original) “on the distinct vulnerabilities of these economies thereby leading to massive outflows.”[1]

I did not go further. However, one mainstream report seems to have picked up where I left off. And they came with a gala performance

As a side note, signs are that the mainstream has increasingly been recognizing that the problem of emerging markets has not been due to demons or bogeymen of current accounts, exchange rate mechanism or Non Performing loans but rather on debt, debt and debt.

The following quote is from Kermal Dervis former Minister of Economic Affairs of Turkey and Vice President of the Brookings Institution[2] (bold mine)

Unfortunately, the real vulnerability of some countries is rooted in private-sector balance sheets, with high leverage accumulating in both the household sector and among non-financial firms. Moreover, in many cases, the corporate sector, having grown accustomed to taking advantage of cheap funds from abroad to finance domestic activities, has significant foreign-currency exposure.

Where that is the case, steep currency depreciation would bring with it serious balance-sheet problems, which, if large enough, would undermine the banking sector, despite strong capital cushions. Banking-sector problems would, in turn, require state intervention, causing the public-debt burden to rise.

Mr. Dervis’ observation “taking advantage of cheap funds” and my theory “ expose on the distinct vulnerabilities that leads to massive outflows” brings into light the missing factor: the US$ 2 trillion EMERGING MARKET CARRY TRADE

In a report by Bank of America Merrill Lynch (BofAML), the troika of authors Ajay Singh Kapur, Ritesh Samadhiya,and Umesha de Silva wrote that the Fed motivated an Emerging market credit bubble and called this “the Pig in the Python”[3]. 

The QE channel worked through Emerging Markets too. By lowering the US government bond yields to a bare minimum, and zero—ish at the short end, a search for yield ensued globally. Emerging market banks and corporates have gone on an international leverage binge, yet another carry trade, the third in 20 years. The first one was driven by European banks, financing East Asian capex –that ended in 1997. The second one was global banks and equity-FDI supporting mainly capex in the BRICs. That ended in 2008. This time, it is increasingly non-equity flows: commercial banks and, more importantly, the bond market –undercounted in the BoP and external debt statistics that conventional analysis looks at.

Like me, the authors question on the accuracy of statistics where they delve deeper only to discover many unreported debt. They write of the difference between resident borrowing from a foreign bank branch in a country as loans issued by residence that is counted in the Balance of Payment (BoP) and from borrowing by the same resident in the offshore bond and inter-bank markets which they consider as loans by nationality, which appear to be unaccounted for in the BoP calculations. The difference according to them have been substantial. 

For externally-issued bonds, USD1042bn has been raised by the nationality of the EM borrower since 2009, USD724bn by residence of the borrower – a gap of USD318bn, or 44%. This undercount is USD165bn in China, USD100bn in Brazil, and USD62bn in Russia. There is evidence that this bond borrowing overseas by EM non-financial corporates is part of a carry trade, with these corporates acting like financial intermediaries. EM banks have also been busy issuing bonds overseas, a part of this carry trade. We do not have the breakdown for international bank loans by residence and nationality

Oh I noted that contra cheerleaders who think that by shouting “forex reserve!” “forex reserve!” “forex reserve!” they can drive away EM demons[4], the authors like me also note how forex reserves have been manifestations of the ‘sins’ of the credit inflation binge rather than as signs of strength.

Since 3Q2008, the US Federal Reserve QE has unleashed a massive USD2tn debt-driven carry trade into emerging markets, disproportionately increasing their forex reserves (by USD2. 7tn from end-3Q2008), their monetary bases (by USD3.2tn), their credit and monetary aggregates (M2 up by USD14.9tn), consequently boosting economic growth and asset prices (mainly property and bonds). As the Fed continues to taper its heterodox policy, we believe these large carry trades are likely to diminish, or be unwound

And here is where it gets more interesting. 

In Asia, the authors worry about the explosive external debt growth from time period of 2008 and 2013 (blue rectangles), mainly from China and Thailand in terms of bank lending and bonds. The red rectangles are the other ASEAN debt position acquired from the FED sponsored EM carry trade.

While the Philippines have the least exposure in nominal US dollar based loans, at 4.34x (!) the Philippines has the 2^nd biggest growth rate after Thailand.

This report seems consistent with the Deutsche Bank report I earlier noted which showed how the companies from the Philippines ramped up on US dollar loans in the global corporate bond markets in 2013.

And it would be natural to see a limited but concentrated bond market growth in the Philippines for one simple reason as I noted[5]

The small size of bond markets fit exactly with the low penetration level of households in the banking and financial system. This means that the dearth of savings being intermediated into investments via the banking sector or via the capital markets have hardly been signs of real growth.

Importantly, because of the small size of the corporate bond market, the top 10 share in terms of % to the total is at 90.8%. Said differently, the benefits and risks of Philippine corporate bonds have been concentrated to these top 10 issuers.

So should the BofAML’s fear of the risks from the unwinding of the massive EM carry trade materialize, it would seem unfortunate that based on the data from both Bank of America Merrill Lynch and Deutsche Bank, the Philippines or ASEAN major hardly be immune from a contagion.

Don’t forget we seem to be seeing accelerating signs of bank runs in emerging markets. Over the past one and a half weeks, Kazakhstan following the massive devaluation endured three bank runs[6], Ukraine suffered a bank run[7] and our neighbor Thailand just had a bank run on a state-owned bank[8]!

And while China hasn’t had a bank run yet, they seem to have undertaken a series of bailouts of delinquent financial institutions.

Sharp volatility in EM financial markets, stock markets fighting off bear markets, rising rates amidst spiraling debt loads, risk of unwinding of carry trades and bank runs, great moment for stocks right?

A final comment on the pig in the python EM carry trade, the above charts seem to suggest that there has been some correlation between US stocks as measured by the S&P 500 (yellow), the USDollar Yen (orange) and Emerging Markets stocks (EEM green) where all three seem to be moving in a synchronous fashion.

While correlation isn’t causation, could such synchronicity be a function of the carry trade in motion? Are performances of stocks based on ‘fundamentals’ or based on the carry trade anchored on US Federal Reserve policies?

Interesting.

---

[1] See Emerging Markets: Why Adjustments For Relative Yield Spreads has been Disorderly February 17, 2014

[2] Kermal Dervis Tailspin or Turbulence? Project Syndicate February 17, 2014

[3] Ajay Singh Kapur, Ritesh Samadhiya,and Umesha de Silva Pig in the Python –the EM carry trade unwind Bank of America Merrill Lynch February 18, 2014

[4] See Emerging Market Turmoil: The Fallacy of Foreign Currency Reserves as Talisman February 3, 2014

[5] See Phisix: Will the Global Risk OFF Environment Intensify? February 3, 2014

[6] See Kazakhstan’s Devaluation Triggers Bank Runs February 20, 2014

[7] See Behind Ukraine’s Bank Run February 22, 2014

[8] See EM Crisis Over? Thailand Hit by a Bank Run February 19, 2014

ASEAN Crisis Watch: Indonesia’s bond market selloff accelerates

A few days back I wrote

Indonesia’s first successful offering at the start of the year represents the initial tranche of the “record IDR 357.96 trillion (USD $29 billion)” bond sales it plans to conduct “from both international and local debt capital markets in 2014”.

The question is what if the current emerging market turmoil spreads to ASEAN, will the Indonesian government be able to raise money from her targeted bond sales? If yes, at what level of rates? If not will she resort to bigger taxes or more inflation by her central bank? Yet how much increase in coupon yields in the bond markets can the Indonesia’s government afford to finance the new round of debt? How will higher rates impact the political and the economic landscape?

Here are more signs of the periphery to the core dynamic where turmoil in emerging markets seem to have spread to ASEAN.

As of this writing Indonesia’s bond market rout at the long curve appears to be accelerating:

Yields of Indonesia’s 10 year rupiah bonds soar back to the levels during the 1st week of the year prior to the government’s global bond sales

So with the yields of 20 year bonds.

Albeit yields of 5 year treasuries have risen they are far from pre bond sale level

The currency the Indonesian rupiah has also been plummeting

Indonesia’s stock market benchmark the JCI’s recent advance appears to have been foiled following the switch to a risk OFF mode. Easy come, easy go.

Indonesia’s CDS spreads have been on an uptrend while the recent EM ruckus seem to have incited a renewed spike.

Indonesia's financial markets have been signaling increasing signs of distress such that the current interest rate levels have not been enough to stanch the stream of outflows. Yet how much hike in interest rate levels can the Indonesian economy sustain before bond market rout transforms into a liquidity squeeze that eventually morphs into a crisis? And will Indonesia's problems remain isolated?

For those who think these are bullish stocks, then good luck to you.

PBoC Injects 255 Yuan to Calm Debt Jitters, Asian Stock Market Celebrate

China’s financial markets “hooked” on liquidity injections, got another shot in the arm with 255 billion yuan of reverse-repurchase agreements by the People’s Bank of China to to large commercial banks

From Bloomberg:

China’s benchmark money-market rate fell while stocks rebounded as the central bank added more than 255 billion yuan ($42 billion) to the financial system and expanded a loan facility to meet Lunar New Year demand for cash.

The seven-day repurchase rate, a gauge of interbank funding availability, dropped 88 basis points to 5.44 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center.

China’s 7 day repo rate (china money.com) has declined on PBoC’s injection (green ellipse). 

Media says that this measure will “reduce risk in the interbank market and help restore confidence as concern mounts about potential defaults” and that “Money-market rates typically spike before the new year break, a period in which cash gifts are made and families get together for celebratory feasts”

The above picture tells of a vastly different story. Those blue arrows on top reveal of the episodes of “major” short term liquidity squeezes over the past year. The (blue) trend line also reveals of a seeming increase in repo rates since the last quarter of 2013. 

Rising frequency of incidences of liquidity turmoil and the seeming gradual build up in the magnitude (expressed via rising trend of repo rates) seem like mounting pressures looking for an outlet valve to ventilate. They seem hardly about celebratory feasts, instead they seem as writing on the wall for a Black Swan.

Curiously despite the action by the PBoC, yields of China’s 10 year bonds remain in a consolidation mode at recent highs.

China’s stock market investors nevertheless cheer the same theme of more "bad news is good news" [I see this as an oversold bounce].  And so with the ASEAN counterparts.

Yet the PBoC’s liquidity injection and declining yields of US treasury notes appear to have hardly calmed ASEAN bond markets which continues to show weakness via higher yields (yes Philippine treasury yields seem as rising today from 1 year through 20 year curve. 10 year at 4.3%). Such has also been expressed via their respective currencies (the USD-Philippine peso is 45.2+ from Friday's 45). Rising stocks amidst rising treasury yields and falling currency represents a widening of unsustainable divergences. 

Well, stock market investors see none of these as risks: again symptoms of what I call as the Aldous Huxley “Facts do not cease to exist because they are ignored” syndrome.

Will an ASEAN Black Swan Event Occur in 2014?

Mainstream talking heads also continue to dismiss how interest rates may affect security prices and the economy. The prevalent belief is that interest rates will remain either perpetually low and that an increase in interest rates will hardly impact on the stock markets.

Even the former value investor Mr. Warren Buffett understands the sine qua non role played interest rates to investments. At CNN Money, in 199 Mr. Buffett wrote[1], (bold mine)

To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.

Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there.

Mr Buffett goes on to cite 1964-1981 where rising interest rates depressed investments, and reversed from 1981 onwards.

As I previously pointed out Discounted Cash Flow analysis of any investments are heavily interest rate sensitive[2] and so as with the debt and interest payments affecting these. 

Last week the Philippine government raised $ 1.5 billion at record low rates via the global markets[3]. Indonesia, despite the financial market pressures equally raised $4 billion but at much higher rates[4]. Indonesia’s foray into the global debt market has been part of the record Rp 357.96 trillion ($29.2 billion) the government plans to raise this year. Both Indonesian and Philippine bonds were reportedly oversubscribed.

Bizarrely, yields across the Philippine treasury curve jumped significantly higher after the successful bond offering.

Stunningly yields of short term one month (upper left) and six month (upper right) treasuries soared by about (TWO HUNDERED) 200 and over (ONE HUNDRED) 100 basis points! Last week’s spike in short term yields has even breached past June levels!

Meanwhile yields of long term 10 year (lower left) and 25 year bonds (lower right) rose by much less but still has risen significantly to reach the June levels.

To me, this raises many questions. Why hasn’t the bullishness of foreigners spilled over to the largely closed Philippine sovereign bond markets which had been in tight control by the banking and government? Could this be that some major local financial institutions appear to be feeling the heat from the recent market pressures? Which institutions may have been affected by the recent spurt of yields? Will the damage be contained?

And…will this be like June a knee jerk reaction or will this represent a new trend? Or will last week’s action serve as portent to the culmination of the convergence trade[5]—the grotesque mispricing of domestic bond markets that has underpinned the current bubble?

If last week’s trend persists then we will see a flattening of the yield curve, which means lesser motives for banks to lend.

Philippine treasuries remained as the only financial markets unscathed by the recent strains; apparently, not anymore.

Getting to be a lot interesting, no?

Unlike the Philippines, Indonesia’s $ 4 billion bond sales did push 10 year local currency bond yields down by about 16 basis points over the last few days.

But all three ASEAN majors, has seen rising yields be it Thailand and Malaysia or even Singapore (down by about 26 basis points from August 2013 highs) and the South Korean counterparts (also down by 12 bps from August 2013 highs)

ASEAN currencies continue to exhibit sustained signs of deterioration. While the USD-Indonesian rupiah (upper left) had an interim late week decline perhaps due to the dollar bond sale, the weak rupiah vis-à-vis the USD remains at a one year high.

Meanwhile, US Dollar continues to strengthen relative to the Thailand baht (upper right) and the Philippines peso (lower left). The US dollar has already broken beyond the September in terms of the rupiah and the baht. The US dollar is also at the verge of a breakout against the peso from the September levels.

The USD-Malaysian ringgit has also staged a weekly decline, nonetheless general trend remains in favor of the USD. The same holds true for the USD-Singapore Dollar but not the USD-South Korean won which has been rallying through the year.

In sum, currency conditions of most ASEAN majors have likewise been exhibiting symptoms of sustained market stress.

This chart by the Philippine Phisix and Thailand’s SET continues to fascinate me. The reason is that both seem as a mirror image of the other. I thought last week that the correlation might break since the SET greeted the New Year or the first day of the year with a 5.23% quasi-crash while the Phisix continued to struggle her way up.

But I guess following this week’s performance, where the Phisix has once again revealed signs of weakness, these two benchmarks may re-converge soon.

Among ASEAN majors it has been Malaysian stocks as measured by the KLCI that have remained defiant of the regional weakness as the KLCI continue to drift at near record highs. Although Indonesian and Singaporean stocks as measured by JCI and STI respectively has regained some grounds they largely remain in doldrums. Meanwhile despite the rising won, the South Korean KOSPI has been sharply deteriorating over the last month.

Whether ASEAN’s market strains are being induced by the Fed’s tapering or not, or from the recent tremors in China’s bond and stock markets or from domestic politics, rising interest rates will put ASEAN’s debt conditions under the spotlight.

And it’s not just bonds, currencies and the stocks. ASEAN’s credit worthiness has been under scrutiny, as measured by Credit Default Swaps (CDS) where the probability of default has been on the rise.

As a recent Bloomberg report puts it last Wednesday, “cost of insuring Malaysia’s sovereign debt climbed to a two-month high” while for “Thailand, the contracts climbed to a four-month high and in the Philippines they reached a level not seen since October.”[6]

Will I recommend buying Philippine or ASEAN stocks under current environment? Generally no but with a possible conditionality based exception: the mining industry.

As for the general markets, I will recommend refraining from catching falling knives and heed the sage of Omaha, Mr. Warren Buffett’s judicious advice, “if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line.”

[update: I adjusted for the font size]

---

[1] Warren Buffett Mr. Buffett on the Stock Market The most celebrated of investors says stocks can't possibly meet the public's expectations. CNN Money November 22, 1999

[2] See Phisix: BSP’s Tetangco Catches Taper Talk Fever July 29, 2013

[3] Wall Street Journal Philippines Raises $1.5 Billion Via Global Bond January 5, 2014

[4] Jakarta Globe Indonesia Sells $4 Billion of Global Bonds for Dollar Supply, January 8, 2014

[5] See Phisix: The Convergence Trade in the Eyes of a Prospective Foreign Investor November 11, 2013

[6] Bloomberg.com Malaysia Default Risk at 2-Month High on China Slowdown Concern January 8, 2014

ASEAN Crisis Watch: Indonesian Bond Market Convulses, Rupiah and Stocks plummet, Thai’s Stock Market New Year Meltdown

I was in a shut down mode when Thailand’s stocks, as measured by the SET, met the new year or 2014 with a 5+% collapse.

The stock market crash had been in tandem with equally a crumbling currency, the Thai baht. 

The USD-Thai Baht has reached a 3 year high yesterday, with the gist of USD Thai baht spike in over just two months. The plummeting baht appears to be accelerating.

All these had mostly been attributed to outflows from political jitters

 

While politics serve as a visible ‘cause’, they are actually aggravating circumstances to Thailand’s hissing credit Bubble.

Thailand’s stunning New Year meltdown serves as a reminder of how fragile ASEAN markets has been.

On the other hand, since last year I have been posting on the growing risks from Indonesia’s sharply deteriorating financial conditions which I call as the Indonesian crisis watch (see here here and here)

Yesterday, Indonesia’s local currency government bond market collapsed, with 10 year yields soaring to a 2011 high.

The bond meltdown has been accompanied with the continued foundering of the USD-rupiah which has now reached a 5 year high.

Indonesian stocks as measured by the JCI likewise fell yesterday. 

In contrast to the SET, the JCI remains relatively resilient. Although the path of least resistance has been on a downside albeit at a moderate pace compared to her peers.

Finally yields of 10 year Philippine government LCY bonds spiked yesterday as the US Treasury counterpart has now drifted at the plus or minus 3% level. 

Has this been another "one off" event as the mainstream likes to portray? Or are these signs of the cracking of the convergence trade? 

The Philippine peso has been in chorus with her ASEAN counterparts as the USD-Php hits a 3 year high.

It should be interesting to see how rising domestic and foreign interest rates along with the steep fall in the Peso will affect the small but concentrated highly leveraged financial system.

Like China, ASEAN markets and economies serve as potential triggers for 2014 Black Swan event.

Ignore the above facts at your own peril.