"The Fed is Done:" Asian-Pacific Currencies, Bonds and Stocks Soar!

  

Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand—Ludwig von Mises 

 

In this issue 

"The Fed is Done:" Asian-Pacific Currencies, Bonds and Stocks Soar! 

I. "The Fed is Done" Spurred a Revival of a Global Asset Mania 

II. The Plunge in the US Dollar Powered Asian Currencies and the Philippine Peso 

III. Global Risk ON: Asian Bonds Rallied, But Philippine Treasury Yields Increased  

IV. Global Stock Market Mania Spills Over to Asia-Pacific 

V. The Philippine PSEi 30’s Tepid Gains 

VI. Manic Markets Can Only Disguise Risk  

 

"The Fed is Done:" Asian-Pacific Currencies, Bonds and Stocks Soar! 

 

Sensing the comeback of the easy money regime, rampaging bulls powered a meltup in global and Asian currencies, bonds, and stocks. 

I. "The Fed is Done" Spurred a Revival of a Global Asset Mania 

The Fed is 'done,' a Bloomberg email headline noted. 

 

The Fed’s pause absent its hawkish undertones, a supply shift in US Treasuries towards T-bills, and a disappointing payroll report, among other unimpressive economic data, spurred this week's remarkable upside volatility in the US and global equity markets.   

 

Figure 1  

The S&P 500 vaulted 5.85% this week for its best showing since November 2022.   Simultaneously, the USD dollar index (DXY) plunged 1.47% while the 10-year UST yield also dived by 5.54%. (Figure 1) 

 

Or, interpreted as a crucial shift into an easing of financial conditions, US capital markets roared.    

 

The week's precipitate boom incited a massive squeeze of shorts, prompted the closures of hedged positions, and revved the trend-following momentum (FOMO). 

 

It also reveals the heft, breadth, and dominance of the US dollar standard system, projected by expectations of Fed policies transmitted into market actions, responses by global central banks, the eurodollar system and the depth of global financialization, which altogether manifests the mounting fragility from a system anchored on escalating leverage from the socialization of financial markets via central bank policies.  

 

Why, then, has the global financial community been fixated or obsessed with the Fed's policies?  

 

Figure 2 

 

And why have many global central banks been on a rate-cutting spree ahead of the FED?   Have they "defeated" inflation?  Or have their economies been in trouble? See my tweet above. (Figure 2, upper window) 

 

Though the latest numbers of central banks slashing rates are in the non-crisis range experienced in 2013-15 or still way below the spikes of the Great Financial Crisis (2008-2009) and the Pandemic recession (2020-2021), one cannot discount further rate cuts since easy money policies are the only mechanism that contemporary central bankers use to address economic downturns and financial stresses.  

 

Also, the last decade or so can't be a relevant template because it operated on a backdrop of disinflation. 

 

II. The Plunge in the US Dollar Powered Asian Currencies and the Philippine Peso 

  

As proof and in validation of our thesis that the latest BSP rate hike was about the Philippine peso, the Bank for International Settlement recently published the tools of Asian central banks. (Figure 2, graph) 

 

Facing the dual challenges of tight global financial conditions and high inflation since 2022, most Asian EMEs have raised policy rates, but more modestly than in other regions. They have also relied more on a variety of complementary policy tools (eg FX intervention and bond market intervention (BIS, November 2023) 

 

Figure 3 

 

The easing wave hit the global financial sphere; the best-performing currencies in Asia-Pacific included the Philippine peso.  (Figure 3, topmost chart)

 

Even with just two trading sessions in a holiday abbreviated week, the spread abruptly and sharply widened from the serendipitous plunge in the 10-year UST yield in the face of a jump in domestic counterpart.  (Figure 3 middle window)

 

The Philippine peso had its 5th best week since 2020 as the USDPHP plummeted (-1.5%).  (Figure 3, lowest graph)

Figure 4 

 

While the Australian and New Zealand dollar rocketed by 2.8% and 3.2%, the cliff dive of the DXY resonated not only with the USDPHP but also with USDTHB (Thai baht).  (Figure 4, upper and lower windows)

 

In any case, the week's drastic moves have yet to become decisive.  Or, the mid-term trends remain intact. 

 

Nonetheless, momentum and Friday's added decline of the DXY and 10-year US Treasury yields point to a breach below the USDPHP 56 level.  

 

One week doesn't a trend make.  Importantly, domestic fundamentals should eventually reassert their force over market impulses. 

 

III. Global Risk ON: Asian Bonds Rallied, But Philippine Treasury Yields Increased

 

Figure 5 

In the meantime, the rally of the 10-year US Treasury (declining yield) reverberated in Asia.  Except for the Philippines and Japan, yields of 10-year sovereign bonds fell.  (Figure 5, topmost pane) 

 

This week's steep volatility has barely altered the yield uptrend in most of the 10-year ASEAN bonds. (Figure 5, middle chart) 

 

In the Philippines, the weekly increases in local Treasuries—primarily on the front through the belly—flattened the curve.  (Figure 5, lowest window left) 

 

Again, as a caveat, two trading days this week translate to possible distortions as many participants may be on holiday. 

 

In addition, the re-emergence of risk-ON sent Asia's credit default swaps CDS tumbling, which implies reduced concerns over the region's credit risks.  (Figure 5, lowest graph, right) 

 

IV. Global Stock Market Mania Spills Over to Asia-Pacific 

Figure 6 

 

The Asian-Pacific region's equity markets also resonated with the sudden boom in the bond markets.   

 

Of the 19 national bellwethers, 17 closed the week higher, with an average return of 1.51%.   

Outside Pakistan, the benefits of the perceived financial easing fell on the laps Developed Asian bourses.  

 

As the IMF and Pakistan negotiated the 2nd tranche of the $3 billion package, its benchmark KSE 100 soared to an all-time high.  

 

And even as the 2nd biggest weekly gainer, New Zealand's NZ50 remained in a downtrend, while Japan's Nikkei 225 drifted on a flag formation. 

 

China's SSEC (+.43%), Indonesia's JKSE (+.44%), and the Philippine PSEi 30 (+.46%) were among the lesser recipients of the easing conditions.  

 

On the other hand, the euphoria eluded the indices of Laos (-2.58%) and Bangladesh (-.13%).  

 

V. The Philippine PSEi 30’s Tepid Gains 

 

At the PSE, the breadth was slightly positive for the broad market (200 advancers versus 144 decliners) and the main index, the PSEi 30 (18-10 and 2 unchanged). 

 

Mainboard volume jumped 24.9% (average daily) from a week ago to Php 3.59 billion.   Yet despite its increase, it has been a long-term downtrend—a reflection of the sordid state of decadent savings.  

 

The coming week should be data-heavy as authorities announce October's statistical inflation (CPI) and the national account (GDP) for the 3Q.  

 

VI. Manic Markets Can Only Disguise Risk  

 

All that said, the easing of financial conditions may goose up the global capital markets for a while. Seasonal factors may contribute to it.    

 

But a capital markets boom defeats the Fed and central bankers' goal of arresting inflation because this would result in the opposite—combust demand in the face of deglobalization and malinvestments.  

 

If markets are expecting "bad news" (slowing or recessionary economy) to transform into good news (asset boom), this could mean a "watch out below" moment. 

 

The world seems to operate in two dimensions (Duoverse).  The first thrives on a blissful oblivion (a bubble) unfazed by reality.  Or, as the preeminent statistician, author, and philosopher Nassim Taleb described, "denigration of history," where "gamblers, investors, and decision-makers feel that the sorts of things that happen to others would not necessarily happen to them." (Taleb, 2001)

 

This week's mania rekindled the hope of a credit-driven asset bubble from the crowd desperate for inflationism. 

 

The next is ground reality: mounting socio-economic strains partly vented as bellicose geopolitical relationships and its feedback mechanism on the back of unprecedented credit-financed malinvestments. 

  

Manic markets can only disguise risk but not avoid or eliminate it. It would only exacerbate financial and economic maladjustments.   

 

More than ever, risks from existing and developing imbalances should reveal themselves in the fullness of time.  

 

 

_____ 

References: 

Prudent Investor, BSP’s Off-Cycle/Emergency Hike was about Protecting Deficit Spending via the Philippine Peso October 29, 2023 

 

Pietro Patelli, Jimmy Shek and Ilhyock Shim, Lessons from recent experiences on exchange rates, capital flows and financial conditions in EMEs BIS Bulletin November 2, 2023 Bank for International Settlements 

 

Nassim Nicholas Taleb Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, Random House Paper Back, p.26  

 

Hopium on the US Fed’s Pivot: Philippine Peso Stage a Multi-Year Weekly Rally! The PSEi 30 Extends Dead Cat’s Bounce, But Treasuries Fall (Yields Climb)

 

The object of speculation may vary widely from one mania or bubble to the next. At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without a real understanding of the processes involved. Not surprisingly, swindler and catchpenny schemes flourish—Charles Kindleberger 

 

In this issue 

Hopium on the US Fed’s Pivot: Philippine Peso Stage a Multi-Year Weekly Rally! The PSEi 30 Extends Dead Cat’s Bounce, But Treasuries Fall (Yields Climb) 

I. Drop in US CPI Whets the Nostalgia of Global Asset Bubbles 

II. Rampant Speculation Pushes Up Asian Assets on the Hopium of Central Bank Easing (Pivot)! 

III. Philippine Peso Stages Multi-year Weekly Rally! The PSEi 30 Extends Dead Cat’s Bounce, But Treasuries Fall (Yields Rose) 

 

Hopium on the US Fed’s Pivot: Philippine Peso Stage a Multi-Year Weekly Rally! The PSEi 30 Extends Dead Cat’s Bounce, But Treasuries Fall (Yields Climb) 

 

Nostalgic over the salad days of credit-financed asset bubbles, a pullback in the US CPI telegraphs the prospective return of easy money policies of central banks.   And global financial markets respond in Pavlovian fashion. Asian markets, including the Philippines, join the bidding shindig. 

 

I. Drop in US CPI Whets the Nostalgia of Global Asset Bubbles 

 

From Bloomberg: “Thursday’s shock CPI print was a positive surprise after a week of worry and risk aversion. It set off one of the biggest cross-asset rallies in decades. The Bloomberg US Treasury index has only had three better days this century. Two were during the pandemic volatility of March 2020 and one was March 18, 2009 – the day the Fed announced plans to expand its QE program… The S&P500 and Nasdaq 100 both also had their best day since 2020. The dollar fell by the most since March 18, 2009. Investment-grade bonds, which are even more yield-sensitive than Treasuries, had their best single day in more than 30 years.” (hat tip: Credit Bubble Bulletin) 

 

First, to expect a fallback in the US CPI should not signify a shock since we understand that no trend goes in a straight line. Since peaking in June at 9.1%, October’s CPI of 7.7% marks the fourth consecutive monthly decline. 

 

Besides, some have argued that the technical adjustments in the calculation of the medical CPI may have prompted its recent decline.  

 

Next, the thunderous bid across global asset markets showcases the return of RISK ON climate.  

 

This epic response represents the world's addiction to credit-fueled asset bubbles. 

Figure 1 

 

In the US, the hopium on a possible pivot by the Fed dramatically loosened the liquidity constrictions on US Treasury markets, the biggest easing since 2008! (Figure 1, upper window)   

 

This shows that a sustained bounce in the financial markets should indicate a return to credit-easing conditions. 

 

Applying the Philippine example, as previously warned, 

 

To contain inflation, the BSP has raised rates at an unprecedented speed and scale.  By raising rates, it targets to curb demand through the 'credit channel,' which means the BSP hopes to drain excess liquidity from the economy. 

  

But instead of hitting its target, a substantial rise in the equity markets extrapolates to an "easing of financial conditions," which may further fuel inflation.  It could encourage bank credit flows toward equity speculation that funnels money supply indirectly to the economy.  

 

An easing of financial conditions in the face of tight supply conditions could serve as the next flashpoint for an explosion of inflation, which could compel another round of forceful responses from central banks.  

 

The tightness in supply conditions represents the cumulative repercussions of various dislocations in the international and domestic division of labor. Exemplifying these disruptions are pandemic policies, protectionism or economic and financial warfare various interventions, and the misallocation of capital. For the latter, the diversion of capital emerged as overinvestments or rampant speculations in financials, real estate, and technology.   

 

Its opportunity costs signified years of underinvestment in commodities (agriculture, metals) and traditional energy. 

 

Easing policies from central banks are likely to see a return when the economy contracts sharply or when the risks of a systemic credit event become imminent.  In any case, stagflation will likely upend or substitute the public's rearview mirror anchored on disinflation and asset bubbles. 

 

As it is, while the declining CPI may prompt the US Fed to slow their pace of rate increases or even reverse course later (pivot), history has shown that "pivots" have barely been bullish for stocks. 

 

As noted above, central bank rate reductions signify stereotyped responses against a liquidity-constrained stumbling or contracting economy. In the US, historically, bear markets accompanied "pivots."  (Figure 1, lower window) 

 

This experience applies to the Philippine setting too.   When the BSP started slashing rates in 2019, the PSEi 30 struggled.  The panic rate cuts in 2020 coincided with the crash of the PSEi 30.Yes, the BSP pivot worked in 2008. But then, the private and public sector's financial conditions were much healthier. (Figure 2, topmost pane) 

 

II. Rampant Speculation Pushes Up Asian Assets on the Hopium of Central Bank Easing (Pivot)! 

 

Last week's slowdown in the US CPI pulled the US dollar drastically lower and dragged down substantially most of the yields in the US treasury curve.   

 

Inversely, global asset markets (everything bubble) responded with a ferocious rally.  

 

Except for the crypto sphere, haunted by last week's collapse of the FTX exchange, prices of stocks, bonds, and commodities spiked! 

 Figure 2 

The return of the risk ON climate pushed higher Asian currencies, most of the region’s equities, and bonds (lower yields). (Figure 2, second to the highest window) 

 

The South Korean won, Thai baht, and Taiwan dollar were the week's biggest winners, up by 7%, 3.5%, and 3.07%, respectively.  

 

Fifteen of the 19 Asian bourses registered positive returns, which averaged 1.84% for the week. (Figure 2, second to the lowest pane) 

 

The weekly leaders were the equity benchmarks of Taiwan (+7.53%), Hong Kong (+7.21%), and South Korea (+5.74%). 

 

10-year benchmark yields of most Asian sovereigns were down (ADB data as of Thursday), except for Malaysia and the Philippines. (Figure 2, lowest pane) 

 

III. Philippine Peso Stages Multi-year Weekly Rally! The PSEi 30 Extends Dead Cat’s Bounce, But Treasuries Fall (Yields Rose) 

 

Over the week, the USD peso plunged by 2.25%, marking the biggest volatility decline in years! (Figure 3, topmost pane) 

 

Nonetheless, ignoring the easing in global treasury markets, BVAL local currency treasury rates climbed across the curve. (Figure 3, second to the highest window) 

Figure 3 

At the Philippine Stock Exchange, on a roll for the fourth week, the benchmark PSEi 30 was up 1.64%, pushing the index near the 6,300 level. Since the week of October 14, the headline benchmark racked up 6.05% in returns. 

 

But again, its ascent has been marred by thin volume, mixed breadth, concentrated gains, and poor market internals. 

 

Weekly returns of the four of the top 5 biggest market cap, SMPH, BDO, AC, and ALI, were mainly responsible for the increase in the PSEi 30. Gains in market cap weights likewise reflect these returns. 

 

The lesson is that the opportunity cost of the goal of deliberately pushing up the index through concentrated pumps is the lack of participation in the broader markets. 

Figure 4 

 

As evidence, the number of daily traded issues (averaged weekly) fell to May 2020, signifying shrinking turnover diffusing into trade activities of the population of listed firms.  Or, lackluster sentiment translates into a diminishing number of issues traded, which affects price discovery. 

 

Volume barely improved too.  Though the weekly average main board volume has been up by 37% since the origin of the four-week rally to Php 4.55 billion this week, this increase demonstrates the base effect.  

 

There were only four occasions where volume exceeded Php 5 billion in 18 trading sessions.  Or the average volume for this period was only Php 4.38 billion, which includes net foreign buying of a daily average of Php 146.7 million. 

 

Though foreign buying helped, this exposes further the liquidity constraints from the mounting scarcity of domestic savings. 

 

To this point, the benchmark climbed amidst the erosion of market liquidity, indicating the tenuousness of the present activities. 

 

And liquidity or turnover has been dependent on or reflects bank liquidity conditions.  The falling trend of the cash-to-deposit ratio of the banking system has resonated with the downtrend of the PSEi 30 volume.  

 

Curiously, several experts expressed optimism that the current winning streak may transform into a bull market.  

 

Good luck with that faith.  

 

But from a chartist perspective, an enormous rounding top continues to torment the PSEi 30. (Figure 4, lowest window) 

 

But more critical than charts, like it or not, rising rates amidst mounting debt loads are crucial risk factors that would weigh on the prices of financial assets.    

 

And present inflationary conditions and the thrust to centralize the economy hardly support an increase in savings necessary for economic investments and placements in the capital markets, which includes equities.   

 

And through the law of demand, rising rates should diminish the number (quantity) of loans demanded. 

 

That said, this rally extends the countercyclical "dead cat's bounce" from the cyclical inflationary/stagflationary bear market.