The PSEi 30 6,500 Enigma: A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

 The house of delusions is cheap to build but drafty to live in, and ready at any instant to fall—A. E. Housman

The PSEi 30 6,500 Enigma:  A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

Along with the rise in global risk appetite, the Philippine PSEi reached 6,500 but its market internals told a different tale. 

The prospect of easy money has whetted the speculative appetite of the global financial markets.

With the US dollar index down by 0.92% this week, it spurred a rally in the currencies and stock markets of the Asia-Pacific region.

Figure 1

Five of the nine ex-Japan Asian currencies rose, led by the Thai baht (THB), Indonesian rupiah (IDR), and the Singapore dollar (SGD). The Philippine peso  (PHP) increased by 0.14%. The heightened speculative fervor was apparent in the region's stock markets. (Figure 1, upper window)

Seventeen of the 19 national bourses in the Asia-Pacific region jumped by an average of 1.43%. China's SSEC and Sri Lanka's Colombo were the only laggards. (Figure 1, lower chart)

Meanwhile, five of the national bourses set fresh all-time highs for the week: Japan, India, Taiwan, Mongolia, and Pakistan.

Simultaneously, the Philippine PSEi 30 marked a second straight weekly gain. 

However, there is an idiosyncratic story behind the PSEi 30’s surge.

Figure 2

This week's advance brought the PSEi 30 back into positive territory year-to-date (+0.66%). 

But gainers were in the minority, with 14 of the 30 members closing higher. Four of the five biggest market cap issues were the focal point of this week's advance. (Figure 2, topmost pane)

Ironically, the average weekly return was only 0.12%, indicating that on an equal-weighted basis, the overall performance was subdued due to balanced upside and downside returns from its members. 

Market breadth in the PSE was slightly negative, with decliners leading advancers for the second consecutive week. (Figure 2, second to the highest image)

Though mainboard volume fell by 23.1% to Php 3.69 billion, the top 10 brokers still controlled a significant majority, averaging 57% of it. (Figure 2, second to the lowest diagram) 

Further, the top 20 traded issues represented 86.1% of the mainboard transactions. (Figure 2, lowest chart) 

All this illustrates the skewed nature of trading activities where institutional players have been propping up the headline index. 

Figure 3

This week’s pump led by ICTSI (+2.92%) has elevated its free float market cap to its highest level. (Figure 3, topmost chart) 

Pumps in BDO (+8.3%) and SM (+2.35%) have also boosted the top 5's free float cap to 50.5%.  BDO ranked third after SM and ICT in terms of free float market cap. 

The share of the top 5’s free float market cap jumped to 50.5%. 

Incidentally, end-session pumps and dumps were comparatively insignificant compared to previous weeks.

Figure 4

In any case, however one slice or dice it, the slack in volume remains the principal factor behind the nearly decade-long drought in returns.

June's gross volume reached a low not seen since 2010, while the first semester's gross volume plummeted to 2011 levels. (Figure 4, topmost and middle charts) 

It is no coincidence that the declining PSE volume has coincided with the banking system's liquidity metric: cash-to-deposit ratio. (Figure 4, lowest graph)

Despite all the constant yelling by the mainstream of statistical hypes, which have been labeled as G-R-O-W-T-H, the PSEi 30 remains one of the region's laggards, which are likely symptoms of capital and savings consumption.

And notwithstanding the perpetual cheerleading, the echo chamber has still been silent about the mounting risks from debt, leveraging, inflation, and various forms of misallocations and malinvestments. They’ve been reticent about the mounting risks of war too! 

Aside from the distortion from the BSP's policies, institutional pumping remains a significant factor behind this bear market. 

Or, the result of such organized pumps is to magnify pricing imbalance by inflating their share prices relative to their natural income streams and distorting capital prices, resulting in the amplification of the misallocation of resources in the real economy.

Figure 5

In the end, besides political objectives (e.g. rising stocks = resilient economy = good governance), another reason could be to prevent the PSEi 30 from sliding into a death cross, potentially prompting further and deeper scale of foreign selling (as in the past). Figure 5

It's worth noting that despite the obvious shift to a wartime economy, which comes at the expense of the market economy, authorities and the mainstream prefers the general public to remain complacent, assuming that everything will remain hunky dory or stable. 

In doing so, authorities can continue accessing public savings to fund their militant political projects (boondoggle) and exercise centralized control over the economy, with institutional cronies acting as their facilitators.  

Bubbles eventually burst. 

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

  

The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it– Strauss & Howe: The Fourth Turning

In this issue

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

I. Reverse Psychology? Philippine Peso as One of Asia’s Worst Performing Currencies?

II. Blissful Oblivion or Willful Negligence: Is the Philippine Peso Immune to the Growing Risk of a Military Conflict?

III. Asian Currencies in the Shadow of a Strong US Dollar

IV. The Gross International Reserves is no Talisman Against the Uptrend of the USDPHP

V. The BSP’s Increasing "Borrowed Reserves"

VI. The Trickle-Down Political Economy’s Dependence on "Twin Deficits" Depletes FX Buffers

VII. Thinning FX Buffers: Slowing Remittances and Tourism, Debt-dependent FDI, and Volatile Foreign Portfolio Flows

VIII. USDPHP is Driven by the Real Economy; Questioning a War-Hawkish Public and Financial Experts, "You Two Are Discussing the Same Country, Aren't You?"

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

While the local media is abuzz with the worsening standoff in the territorial dispute between the Philippine government and China, and the Philippine Peso nearing record levels, financial experts are oddly silent about the economic risks involved.

I. Reverse Psychology? Philippine Peso as One of Asia’s Worst Performing Currencies?

Figure 1

Mainstream experts seem more confused than ever about the state of the US dollar-Philippine peso $USDPHP. 

As the $USDPHP approaches a milepost, they appear to be sugarcoating the fragility of the Philippine peso by attributing the peso’s weakness to the divergent policy conditions between the US Federal Reserve and the Bangko Sentral ng Pilipinas (BSP). (Figure 1, topmost image)

They are actually defending the Philippine peso when they allude to the strength of the US dollar, the elevated Gross International Reserves (GIR), and other possible BSP toolkits. 

Using what seems as reverse psychology, a foreign institution even projected that the peso would "become one of Asia’s worst-performing currencies," given the BSP’s ‘dovish’ stance. (Figure 1, middle visual)

Bizarrely, they placed a marker for this: the USDPHP would "hold at 58 per dollar, although it may weaken to as low as 58.60, which would be a few centavos away from the record-low 59 it hit in 2022." 

Amazing. 

The thing is, the news was hardly a projection; it was a description of present events. 

The USDPHP signified the fourth worst currency in Asia (year-to-date), after the Japanese yen $USDJPY, South Korean won $USDKRW, and Indonesian rupiah $USDINR—as of June 21st. (Figure 1, lowest chart) 

By placing a boundary for the "worst in Asia" assumption to hold, it translates to either a positional stasis or that most Asian currencies would do better because of the so-called ‘dovish’ stance of the BSP. 

Figure 2

Ironically, the nominal yield spread between the 10-year Philippine BVAL and US Treasury bonds has been rising in favor of the former.

Operating under the belief of arbitrage opportunities, the consensus thinks that relatively higher (nominal) rates for the Philippine Treasury should favor the peso.

But this dynamic has barely been the case, as a relatively lower Philippine yield has coincided with a strong peso and vice versa from 2019 to Q1 2022. Since then, USDPHP has climbed ahead despite the spread—or the correlation broke from Q2 2022 to the present. (Figure 2, topmost diagram) 

In brief, this loose correlation does not support the popular thesis.

II. Blissful Oblivion or Willful Negligence: Is the Philippine Peso Immune to the Growing Risk of a Military Conflict?

Here is what the Overton Window critically overlooks: the escalating standoff over the territorial dispute between the Philippines and the Chinese government.

Haven't you noticed? The Sino-Philippine West Philippine Sea showdown has been splashed all over mainstream media. Despite this, there is nearly ZERO attribution about it to the Philippine peso or the Philippine economy. This stark contrast underscores the disconnect between the intense diplomatic and military tensions and the lack of insights into its potential economic fallout.

That is to say, while the risks of the Philippines becoming the Ukraine of Asia grows with every confrontation, the consensus oxymoronically sees such risks as non-existent. 

Could they be talking about the Philippines? Why the complete absence of the mounting risks of war?

This seemingly incredible blindness represents either "blissful oblivion" or "willful negligence" over the possible cataclysmic risks from an outbreak of violence. 

As I recently posted on my X (formerly Twitter) account, at the onset of wars, the currencies of those involved—namely the Russian ruble $USDRUB, Ukraine’s hryvnia $USDUAH, and Israel’s new shekel $USDILS—materially fell against the US dollar. (Figure 2, lower image)

That's a blueprint for the Philippine economy that we should expect when water cannons and knives escalate into a shooting battle.

Aside from a possible plunge in the Philippine peso, depending on the scale of war, we can expect a double "deep" recession, a possible stock market crash (if it remains open), rolling brownouts—when power plants become military targets—which means disruptions in digital payments and bank ATM withdrawals, massive disruptions in the division of labor, and the BSP printing more money—which leads to stagflation!

While we earnestly pray that this does not happen, as there are other peaceful options like Vietnam’s "bamboo diplomacy," the Asian version of foreign policy neutrality, it is a risk that every Philippine resident confronts as contending parties to territorial claims remain intransigent and lean on belligerency.

Although we won’t expand further on the geopolitical dimension of the rising risks of a Sino-Philippine military conflict, it's crucial to note that the US dollar-Philippine peso exchange rate is not insulated from these rising tensions. 

My brief two cents on the Philippine government’s turnaround regarding the alleged "armed aggression" of China in an X thread. 

III. Asian Currencies in the Shadow of a Strong US Dollar 

Operating under the de facto US dollar standard, the US and its political, economic, and financial activities overseas have a distinctive impact on the world. 

In addition to the transition away from globalization and domestic politics, geopolitics is another key factor contributing to the recent increasing value of the USD. 

An abrupt rise in the US dollar is often a sign of emerging economic distress.

Figure 3 

Unlike its popular portrayal, the rising value of the USD is not an anomaly. 

Using the US dollar index $DXY as a benchmark, it has been in an uptrend since 2021, supported by a reverse head-and-shoulders pattern. More importantly, the longer-term trend shows a 9-year uptrend. (Figure 3, topmost and second to the highest graphs) 

The $DXY is composed of a weighted basket of developed economy currencies, including the European euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. 

The uptrend in the USD is evident across several ASEAN currencies, including the Indonesian rupiah $USDIDR, the Philippine peso, the Malaysian ringgit $USDMYR, and the Vietnam dong $USDVND, though it's not shown in the chart. (Figure 3, second to the lowest chart) 

In the long term, however, the USD has underperformed against the Thai baht $USDTHB and Singapore dollar $USDSGD. (Figure 3, lowest window)

Using the mainstream's logic, the Bank of Indonesia (BI) unexpectedly raised rates in April in an attempt to "anchor the rupiah". Despite this move, the $USDIDR pair carved out a milestone high last week. Was the BI's decision still "dovish"? 

The essence lies in the fact that Asian currencies exhibit asymmetric performances that are underpinned by their idiosyncratic or unique domestic conditions. 

A sweeping generalization of a strong USD represents a fallacy of composition.

IV. The Gross International Reserves is no Talisman Against the Uptrend of the USDPHP

Figure 4

More intriguing is the widespread conviction that the country's foreign exchange reserves (GIR) serve as a talisman against the rising US dollar, which appears to be more of a manifestation of faith or defending piety than an analysis based on economic theory and data.

If this belief were valid, then $USDPHP pair would have underperformed. Alternatively, there wouldn’t have been an uptrend in $USDPHP if the GIR had functioned as advertised. (Figure 4, topmost image)

Instead, we see that the GIR fell upon its drawdown by the BSP to defend the peso when the $USDPHP carved a record in 2022.

Ironically, the BSP accelerated its accumulation of GIR in 2019-2020 just at the late stage of the peso's rally.

Since then, it has been a tango for the GIR and USDPHP as both proceeded higher.

Separately, as evident from the BSP's annual balance sheet, the strength of the $USDPHP has coincided with an increasing percentage share of BSP's local currency issuance against its total liabilities. (Figure 4, middle chart)

In short, the primary driver of the USD/PHP's uptrend has been the BSP's money printing operations, not the GIR.

V. The BSP’s Increasing "Borrowed Reserves"

Furthermore, what authorities say is often taken as "gospel truth," with few questioning the numbers behind them.

Let us turn to the GIR. 

The Philippine government borrowed USD 2 billion in early May.

The BSP described the increase in its GIR for the same month as follows: "The month-on-month increase in the GIR level reflected mainly the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP’s investments abroad." (BSP, 2024) 

Subsequently, the BSP also disclosed that its Balance of Payments (BOP) showed a surplus during the same period: "The BOP surplus in May 2024 reflected inflows arising mainly from the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP’s investments abroad." (BSP, 2024)

See that? The BSP admitted that "borrowed reserves" has constituted a part of its GIR and BOP. Hence, the USDPHP ignored them and proceeded higher. (Figure 4, lowest graph)

Figure 5

May’s US dollar borrowings will likely add to the USD 128.7 billion of external debt, which was up by 8.32% in Q1 2024. (Figure 5, topmost graph)

External debt has soared past the BSP’s GIR of USD 104.1 billion for the same period.

Yet, as acknowledged by the BSP, part of external debt has been incorporated into the GIR.

There’s more to consider.

As the Philippines’ April GIR showed, based on IMF’s International Reserves and Foreign Currency Liquidity (IRFCL), the BSP has been selling off its gold reserves and has boosted its use of Other Reserve Assets (ORA).  The BSP’s physical gold reserves last April signified a multi-year low! (Figure 5, middle pane)

Other Reserve Assets comprise financial derivatives, short-term currency loans, repos, and other liquid assets. (IMF, IRFCL)

During the international easy money era, ORA became a feature in the GIR build-up from 2018-2020 and the rally of the peso. (Figure 5, lowest chart)

However, rising costs compelled the BSP to reduce its use in 2022. Nonetheless, the BSP returned to it last April 2024.

The thing is, "borrowed reserves" represent "US dollar shorts," which is attendant with an increasing likelihood of maturity mismatches, especially during times of stress.

Furthermore, "borrowed reserves" will need payment or refinancing. The greater the borrowings, the higher interest payments, refinancing, and principal payments, even in the assumption of steady rates, which translates to increased pressure for organic sourcing of USD revenues.

Otherwise, the economy and government would be forced to continue borrowing externally to meet growing USD liquidity needs, while increasing domestic liquidity, which would amplify the pressure for the Philippine peso to depreciate further. 

VI. The Trickle-Down Political Economy’s Dependence on "Twin Deficits" Depletes FX Buffers 

Given the entrenched "trickle-down" political-economic architecture driving the borrowing-to-spend (to prosperity) paradigm, which has engendered a record savings-investment gap, it is difficult to envision a structural shift in the current dynamics—specifically, a transition away from debt dependence—without a disorderly adjustment. 

Underpinned by Keynesian ideology, the establishment has made little or no effort to promote this essential structural change.

Rather than acknowledging the accruing tradeoffs from transitioning to a centralized political economy anchored in fiscal spending (infrastructure and the war economy) and increasing bureaucratization, the consensus continues to promote the illusion of a consumer-driven economy. 

Figure 6

A strengthening economy would swell trade deficits, given the structural shortcomings in local production, while an acceleration of the fiscal deficit would magnify the credit-financed "twin deficits." 

As evidence, April’s trade deficit expanded as imports grew by 12.6%, driven by increases in capital imports (+10.5%) and consumer goods (+15.7%). (Figure 6, top, middle and lowest chart) 

Therefore, authorities would need to rely on remittances, tourism, service exports, FDIs, foreign portfolio flows, or borrowings to cover the FX deficits.

VII. Thinning FX Buffers: Slowing Remittances and Tourism, Debt-dependent FDI, and Volatile Foreign Portfolio Flows

Figure 7

Despite record-high nominal Overseas Filipino Workers (OFW) remittances last April, their growth rate has been slowing down primarily due to base effects.

Moreover, remittance flows are heavily influenced by global economic conditions, which may face hurdles from increasing barriers to social mobility. For instance, rising economic barriers and increased nationalism are expected to slow OFW flows.

On the other hand, vigorous tourism growth in 2023, fueled by strong domestic "revenge travel" and improved foreign arrivals, appears to have cooled down in 2024.

While FDI flows seem to be improving, the majority of these flows consist of debt. Reported FDI flows were up 23% last March and 42% in the first quarter, with debt accounting for 68% and 62% of the share, respectively.

Intercompany debt infusions do not guarantee genuine investments. Instead, they expand the USD shorts.

Additionally, taking sides in the geopolitical hegemonic contest could deter investors, making politics rather than markets the determinant of investment flows.

Meanwhile, volatile flows from foreign portfolio exposure cannot be relied upon to boost demand for the peso. This is primarily due to the structural inadequacy of the capital markets' depth (PSE and the fixed income market), which remain dominated by the elites.

Another fundamental reason is that portfolio flows are heavily dependent on global risk conditions.

Lastly, services exports appear to be the remaining hope to cushion the peso via USD revenues. So far, the industry is said to be on track to meet its growth targets this year.

However, any slowdown in this sector would exacerbate USD funding pressures.

VIII. USDPHP is Driven by the Real Economy; Questioning a War-Hawkish Public and Financial Experts, "You Two Are Discussing the Same Country, Aren't You?" 

It is clear that the USDPHP has not been primarily driven by BSP-FED policy divergence but by real economic factors, including the BSP’s domestic monetary operations. 

If the current arrangements have resulted in thin buffers, imagine what an outbreak of military conflict would do. 

The striking divergence between a war-hawkish leaning public and the absence of discussion about its risks in the domestic financial sphere reminds me of the glaring disparity in the fact-finding report by two of former US President John F. Kennedy's foreign policy advisors, Victor Krulak and Joseph Mendenhall, on Vietnam. President Kennedy reportedly asked both, "You two did visit the same country, didn't you?" 

Paraphrasing Kennedy and alluding to local media and domestic financial experts, "You two are discussing the same country, aren't you?"

_____

References: 

Bangko Sentral ng Pilipinas, End-May 2024 GIR Level Rises to US$104.48 Billion June 7, 2024, bsp.gov.ph 

Bangko Sentral ng Pilipinas, BOP Posts US$2.0 Billion Surplus in May 2024; End-May GIR Rises to US$105.0 Billion June 19, 2024 bsp.gov.ph

International Monetary Fund, INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY GUIDELINES FOR A DATA TEMPLATE, p.25 imf.org

 

PSEi 30: Global Asset Liquidations Sparked the Largest Weekly Decline in 2024; The Silent Transition to a Global War Economy!

 

Military Socialism is the Socialism of a state in which all institutions are designed for the prosecution of war. It is a State Socialism in which the scale of values for determining social status and the income of citizens is based exclusively or preferably on the position held in the fighting forces. The higher the military rank the greater the social value and the claim on the national dividend—Ludwig von Mises

 

In this issue

PSEi 30: Global Asset Liquidations Sparked the Largest Weekly Decline in 2024; The Silent Transition to a Global War Economy!

I. PSEi 30’s Year-to-Date Gains Evaporate in 9 Trading Days! An Autopsy of the PSEi 30’s 3.25% Weekly Plunge

II. The National Team Cushioned the PSEi 30s Plunge

III. Global Tightening Spurred Liquidations on Rising Risk Aversion and Deleveraging: Rising US Dollar, Higher Global Bond Yields

IV. Tightening Triggered Risk Aversion Through Global Stock Markets Sell-offs

V. The Silent Transition to a Global War Economy!

 

PSEi 30: Global Asset Liquidations Sparked the Largest Weekly Decline in 2024; The Silent Transition to a Global War Economy!

 

The hope for the revival of the bull market has encountered stiff resistance, as the PSEi 30 erased year-to-date gains last week.  We explore why the transition to a war economy is hardly a positive sign for stocks.

I. PSEi 30’s Year-to-Date Gains Evaporate in 9 Trading Days! An Autopsy of the PSEi 30’s 3.25% Weekly Plunge

 

So, what happened to the establishment's wet dream for the supposed return or revival of the PSE's bull market?

Figure 1

On April 16th, the PSEi 30 was monkey-hammered by 2.4% just a day before the Philippine Stock Exchange published its infographics to flaunt its 7% YTD returns last March. (Figure 1, upper diagram)

 

As posted in my tweet, it took only 9-trading sessions to eradicate or reverse the YTD returns. (Figure 1, lower image) 

 

Or, three months of gains obliterated in just 9-trading sessions! Incredible. 

 

As predicted, the PSEi 30 did bounce in the next two days, but by the week's close, it surrendered most of it anyway.

 

The PSEi 30 plunged 3.25% (WoW), the largest for the year and the most since September 2022.

 

The week of April 19th ended with the PSEi 30 slightly down by 0.11% year-to-date.

Figure 2

The property sector led the sectoral cascade with a 5.8% decline, supported by the broader member base. Holdings and industrials also dived by 4.01% and 3.83%, respectively. (Figure 2, topmost window)

 

26 of the 30 elite members registered a weekly decline, with an average of -3.97%. (Figure 2, middle chart) The difference between the headline and the broader index manifests the influence of the weightings of the free float market cap share.

 

The carnage was also visible in the PSE constellation, with 585 decliners against 367 advancers, resulting in a negative breadth of 218, the largest since the week of March 17th, 2023. (Figure 2, lowest graph)

 

The PSEi 30, which closed at 6,443 on April 19th, returned to mid-December 2023 levels.

 

II. The National Team Cushioned the PSEi 30s Plunge

 

There is little awareness that the index managers cushioned the PSEi 30's plunge.

 

Figure 3

 

Because BPI shares soared by 4.64%, and because the scale of decrease by the biggest market cap issues had been less than the average, the free-float market cap weights of the ICT (-0.48%) and three PSEi banks, along with the PSEi 30's top 5, climbed to their respective records! (Figure 3 upper and lower charts)

 

That's right. ICT + banks have a historic share of 22.6%, while the PSEi 30's top 5 issues control a record 51.6% of the headline index (as of April 18th).

 

This development suggests mounting concentration risks in the index, notwithstanding the skewing of other aspects such as valuations.

 

III. Global Tightening Spurred Liquidations on Rising Risk Aversion and Deleveraging: Rising US Dollar, Higher Global Bond Yields

 

Why April's meltdown?

 

In a word, tightening.

 

The current environment, both local and international, has shifted from easing to tightening—resulting in 'de-risking' and deleveraging.

 

Proof?

Figure 4

 

Though the USD index $DXY rose by only 0.1% this week, it pressured emerging markets and Asian currencies lower. (Figure 4, topmost pane)

 

The US dollar-Philippine peso $USDPHP exchange rate soared 1.94%, against the Indonesian rupiah $USDIDR 2.6%—based on Bloomberg data. (Figure 4, middle and lowest charts)  These were the weakest currencies in the region.

 

To quote analyst Doug Noland of the CBB,

 

"For the week, the Mexican peso declined 2.6%, the Indonesia rupiah 2.5%, the Philippine peso 1.9%, the Brazilian real 1.6%, the South African rand 1.3%, and the Colombian peso 1.3%...Losses are mounting throughout Asian currency markets. The Japanese yen has declined 8.8% y-t-d, the Thai baht 7.4%, the South Korean won 6.8%, the Taiwanese dollar 5.6%, the Indonesian rupiah 5.3%, the Malaysian ringgit 4.0%, and the Philippine peso 3.9%. (Noland, 2024)

Figure 5

 

Further, the rising weekly yields of local currency-denominated Asian 10-year Treasuries have centered mostly on Indonesia, the Philippines, and Vietnam. (Figure 5, top and middle graphs)

 

Philippine rates have risen almost across the board, but the BVAL curve has steepened sharply—a presage of a potential upswing in inflation. (Figure 5, lowest chart)

 

Moreover, for USD-issued bonds, again Mr. Noland,

 

Fragile EM bond markets remained under pressure this week. In dollar-denominated EM bonds, Indonesia yields rose 13 bps to 5.28% (one-month rise 39bps), Philippines eight bps to 5.39% (35bps), Panama 23 bps to 5.41% (50bps), Colombia six bps to 7.69% (52bps), and Brazil three bps to 6.73% (25bps). Over the past month, local currency bond yields were up 116 bps in Turkey, 66 bps in Colombia, 61 bps in Brazil, 58 bps in Mexico, 52 bps in Hungary, 50 bps in Peru, and 50 bps in the Philippines. (bold added)

 

Simply put, the unwinding of speculative leveraged via carry trades and derivatives led to a series of asset liquidations globally.

 

III. Tightening Triggered Risk Aversion Through Global Stock Markets Sell-offs

Figure 6

This dynamic became evident in stocks, as Asian Pacific bourses experienced a rout as well. Out of the nineteen national indices, sixteen posted declines, with an average weekly drop of 2.4%.

The hardest-hit were Vietnam, plagued by a massive bank scandal and the $24 billion bailout by its central bank; Japan's Nikkei, pressured by the multi-year low in the yen; and Taiwan's bourse, affected by the meltdown in US big tech stocks. (Figure 6, upper image)

 

The "unstoppable" momentum in US AI, big-tech stocks, and crypto may have hit a wall, as evidenced by NVDA's plunge of 9.76% and the Nasdaq 100's fall of 3.9% last Friday. Week over week, NVDA dived by 13.6%, the Nasdaq 100 by 5.52%, and Bitcoin by 3.9%. (Figure 6, lower diagram)

 

While Pakistan’s Karachi 100 continued to hit back-to-back record highs this week, the all-time highs reached this year in four of the six national indices seem to be in peril (Japan, Taiwan, Australia, and Indonesia). Meanwhile, Pakistan’s government reportedly asked the IMF for another bailout.

 

At the PSE, foreign money liquidations played a significant role in the stampede out of Philippine equities. A series of daily outflows of foreign money started on March 22nd and has only crescendoed.

 

Foreign money reportedly sold off in the last four weeks, with last week's Php 3.3 billion signifying the largest outflow since the week ending October 13th, 2023. Foreign trade accounted for 51% of the gross turnover—the highest since March 15th, 2024.

 

Given the nation’s tenuous savings, the torrent of foreign money exodus exposed the vulnerability of the market's low volume turnover to heightened price volatility—as we have been emphasizing. (Prudent Investor, 2023)

 

Only a few issues—ICT, banks, and SM—received support from the Index managers or the local version of the "National Team."

 

IV. The Silent Transition to a Global War Economy!

 

Certainly, noxious geopolitical events influenced part of the selloff.

 

Iran’s much-telegraphed retaliation against Israel’s bombing of the former’s embassy in Syria and vice versa—whether a "mock war" (similar to the US-Spanish "Battle of Manila in 1898") or limited strikes (on orders from the higher powers)—demonstrates the various tripwires in the intensifying geopolitical competition and tension over global hegemony.

 

The US Deep State's "forever wars" appear to have reached a critical turning point.

As we keep emphasizing, the global economy has been transitioning to a war economy—marked by increasing "hot" or kinetic wars or the unveiling of World War 3 (with a diverse character from its predecessors), the escalating weaponization of money, trade, investments, information, social mobility, etc., and the rapid expansion of deficit spending, this time focused on the national defense industry justified on national security concerns. (Prudent Investor, 2024)

Defense spending is bound to be the next source of “stimulus,” coming at the expense of consumers.

Figure 7

 

An example would be the increasing use of industrial policy (Figure 7), which the recently IMF pointed out,

 

Many countries are ramping up industrial policy to boost innovation in specific sectors in the hope of reigniting productivity and long-term growth, amid security concerns. Major initiatives are springing up around the world, such as the United States’ CHIPS and Science Act, which will fund domestic research and semiconductor manufacturing, the European Union’s Green Deal Industrial Plan, which supports the bloc’s transition to climate neutrality, the New Direction on Economy and Industrial Policy in Japan, or the K-Chips Act in Korea, alongside longstanding policies in emerging market economies like China. (bold added) (IMF, 2024)

 

On this account, it is unsurprising to expect the inflation cycle to accelerate, accompanied by higher rates and slower economic growth  (stagflation) as well as heightened credit risks—given the unprecedented systemic leverage globally. 

 

The war economy also translates to the increasing embrace of socialism via a "big government," coming at the expense of civil liberties.

 

Certainly, because there are no trends that operate in a straight line, there will be rebounds or countercyclical forces (fierce bear market rallies). But the latest meltdown reinforced the (structural) bear market in action for the PSE. 

Of course, there will always be some viable trade opportunities, but for most, this would amount to "catching a falling knife."

 

None of this is new to our readers.

 

Be careful out there.

 

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references

 

Doug Noland, World-Wide De-Risking/Deleveraging, April 19, 2024, creditbubblebulletinblogspot.com

 

Prudent Investor Newsletters, The Philippine PSEi 30 Jumped 3.9% Courtesy of the "National Team," The "Powell Pivot:" A Christmas Gift to the Wall Street of the World? December 17, 2023, Substack.com

 

Prudent Investor Newsletters, What Surprise is in Store for the 2024 Year of the Wooden Dragon? February 11, 2024, Substack.com

 

 

Era Dabla-Norris, Daniel Garcia-Macia, Vitor Gaspar, Li Liu, Industrial Policy Is Not a Magic Cure for Slow Growth, April 10, 2024