Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!

Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!

As negative-yielding sovereigns spread with the entire Swiss curve in the negative, Germany’s 30-year yield remains the only positive.

Global bond yields hit record low prior to the payroll reports.

German bunds fell below the ECB’s deposit rates for the first time ever!

Hong Kong’s 1-week interbank lending rate (HIBOR) raced to 2008 levels to highlight symptoms of liquidity squeeze!

In the meantime, China’s overnight interbank lending rate (SHIBOR) falls to 2009 lows last Thursday, to signify panic hoarding by banks.

Finally, when the public refuses to borrow, just forced them to. Nigeria’s central bank orders banks to lend money.  

You can lead the horse to the water, but you can’t make it drink.

Unfortunately, that’s the only thing central banks know of.

China’s Government Launches Xi Jinping Put 2.0! How Strong Will Asia Be In the Face of a China epicenter Asian Crisis 2.0?

China’s Government Launches Xi Jinping Put 2.0! How Strong Will Asia Be In the Face of a China epicenter Asian Crisis 2.0?

The Xi Jinping Put is back!

From Reuters: China’s regulators lined up to rally market confidence on Friday with new rules, measures and words of comfort as shares brushed near four-year lows for the second straight day before surging. Vice Premier Liu He, who oversees the economy and the financial sector, supplemented regulators’ moves by saying the recent stock market slump “provides good investment opportunity” and that economic problems should be treated rationally… Earlier in the day, the securities regulator, central bank and banking and insurance regulator all pledged steps to bolster market sentiment as China reported its weakest pace of economic growth since the global financial crisis for the third quarter.

Figure 1

Last Friday, China’s main national equity benchmark, the Shanghai Composite (SSEC), opened the day’s session sharply lower (-1.25%) and had a short rally to almost close the deficit. The botched rally sent the index lurching back near the early morning lows.

By mid-morning, the rally found a second wind to send the index to neutral at the lunch break. When the afternoon session commenced, the index advanced mightily and never looked back.  In a wild roller-coaster session, the afternoon spike in theSSEC ended with a 2.58% advance, pruned the week’s losses to -2.17% (-22.88% year to date; -28.35% from January 24th high)

Unlike the Philippines where the bulk of price fixing manipulation comes with ‘tails’ at the closing bell, China’s National Team operates within the regular market session.

Intensive leveraging typically characterizes stock market bubbles. And the recent crash of the Chinese stock market exhibits such symptoms.

About 4.5 trillion yuan (US$648.6 billion), which amounts to an estimated 13 percent of the combined market capitalization of stocks on the Shanghai and Shenzhen exchanges, were pledged as collateral for loans, according to the South China Morning Post. In the face of falling share prices, creditors either demand additional collateral from debtors or were impelled to liquidate ‘pledged’ shares, thereby accelerating the stock market rout. China’s central bank, the People’s Bank of China (PBOC), assured the investing public that it would use various monetary tools such as re-lending and medium-term lending facilities to ease the liquidity crunch.

Liquidations based on collateral calls will most likely spread to the real economy. So based on path dependency, the proposed policy solutions to liquidity issues from systemic credit impairments by the PBOC is to extend more credit! Solve substance addiction by the provision of more of the same substance! Solve credit problems with more credit!

Liquidation has not just occurred in China’s stock market. China’s offshore yuan fell 2.1% this week and has been fast approaching its December 2016 USD-CNH high of 6.98!

When China’s stock market crashed in June 2015, the CNH was stable. In contrast, ongoing liquidations have now plagued both the CNH and the SSEC.

And more reports surfacing exposing China’s ‘skeleton in the closet’ debt in the real economy.

From the Financial Times: China could be facing a “debt iceberg with titanic credit risks” following a boom in infrastructure projects by local governments around the country, S&P Global has warned. Local governments may have accrued a debt pile hidden off their balance sheet as high as Rmb30tn to Rmb40tn ($4.3tn to $5.8tn) following “rampant” growth in borrowings, the rating agency estimated. The mounting debt in so-called local government financing vehicles, or LGFVs, hit an “alarming” 60 per cent of China’s gross domestic product at the end of last year and was expected to lead to increasing defaults at companies connected to regional authorities. The estimates come amid long-running concerns over debt levels in China, which has seen what some analysts regard as excessive bank lending in the wake of the financial crisis that has created unsustainable bubbles in property and other assets. (bold mine)

And the PBOC may have shifted its policies towards Hong Kong that might have caused liquidity squeezes (interest rate spikes) and sharp volatility in the USD-HKD last September. Of course, the FED’s policies had some influence too.

Figure 2

When China experienced a stock market crash in 2015, the Hong Kong stock market plunged too (-35% peak-to-trough). A short bout of volatility hounded the Hong Kong dollar in early 2016. Nevertheless, HIBOR rates were benign and unaffected by the events in the stock markets.

As an aside, as of Friday, the Hang Seng Index was down 14.6% year-to-date and down 22.9% from the record high in January 26.

Today, turmoil affects both Hong Kong and China.

In piecing together the current events, the PBOC’s whack-a-mole strategy hasn’t been working.  China's manifold bubbles have been in search of an outlet valve.  And the PBOC appears to have run out of tools to buy it time from a major eruption.

And further interventions to cosmetically boost asset prices will lead to more intense instability within its financial system.  And when the cracks spread and become too large contain, everything will unravel.

And here’s a symptom. From the Financial Times (October 16, 2018): A wave of protests by Chinese homeowners against falling property prices in several cities has raised fears of a downturn in the country’s real estate market, adding to pressure on Beijing to stimulate the economy. Homeowners in Shanghai and other large cities took to the streets this month to demand refunds on their homes after property developers cut prices on new properties to stimulate sales. In Shanghai, dozens of angry homeowners descended on the sales office of a complex that offered 25 per cent discounts to demand refunds, causing clashes that damaged the sales office, according to online reports that were quickly removed by censors. Similar protests have been reported in the large cities of Xiamen and Guiyang as well as several smaller cities. The property sector is estimated to account for 15 per cent of China’s gross domestic product, with the total rising closer to 30 per cent if related industries are included. A downturn would add to financial strains on China’s heavily indebted property developers which paid record sums for land during auctions last year but are now struggling to recoup their investment. Other evidence of a downturn is starting to emerge. Sales by floor area dropped 27 per cent year on year during the “golden week” national holiday earlier this month, a peak period for house buying in China, according to research house CRIC, which tracks 31 cities.

Just which of the region’s economies and financial markets will survive an Asian crisis 2.0 with the epicenter in China?

The coming crisis could make all other crises a walk in the park. Instead of one crisis, it may be a combination of multiple crises happening at once: 1997 (Asian crisis), 2000 (dotcom) 2007 (US crisis), 2011 (European debt crisis) and emerging market crisis.

 

Figure 3

Could this periphery to the core transmission serve as the nascent stage? (Pointer to Charlie Bilelio)

Asian Crisis 2.0 Watch: The Second Semester is Vulnerable To Crashes, The PhiSYx Syndrome

In this issue

Asian Crisis 2.0 Watch: The Second Semester is Vulnerable To Crashes, The PhiSYx Syndrome

-Philippine Equity Rally Amplifies The PhiSYx Syndrome

-Sustained Tremors in Asian Markets

-Asian Crisis 2.0 Redux

-The Second Semester is Vulnerable To Crashes

Asian Crisis 2.0 Watch: The Second Semester is Vulnerable To Crashes, The PhiSYx Syndrome

Will an oversold bounce morph into a fifth bull market in the PSEi?

Though anything can happen, if the epoch of free money is over that scenario would be a small or remote possibility

First of all, it has not just been in the Philippines, but liquidations have been occurring in Asia. 

Secondly, liquidations have not been limited to stocks but on currencies and bonds as well.

Thirdly, the epicenter of a likely financial tremor should be of concern to serious investors.

Asian equity markets continue to hemorrhage.

Philippine Equity Rally Amplifies The PhiSYx Syndrome

But first the Philippines.

After last week’s tremendous drubbing, the Philippine PhiSYx was yanked higher to close in the positive. Yes, that’s right. Since the Sy’s virtually control the market capitalization share distribution of the headline index, the Philippine equity benchmark should be re-baptized as PhiSYx or PSYEi.

Because SMPH flew by 8.12% due mainly to an engineered pump, which sent the index 1.8% higher, the three Sy-owned companies has taken control of the index with a shocking 29.98% share, as of Friday. SMPH contributed more than 30% share of the week’s gain.  

And the addition of the three Ayala firms should translate to six firms having an aggregate market cap share of a striking 50.84%! That’s right. The PhisYx is not about 30 firms as popularly assumed but about primarily the Sys and the Ayalas.

So persistent brazen price fixing process has benefited mainly the Sys, which led to their current standings in market cap ranking, and their prestigious Forbes wealth status. 

Has any expert ever talked about this?

So the recent bear markets have only consolidated the Sy’s stranglehold of the index.

Be it known that I have no personal beef with the Sys. However, as a disciple of the markets, I am outraged by whosoever has been mangling the pricing system unfettered.

Sustained Tremors in Asian Markets

Figure 1

The Philippines (+1.85%) along with the national bourses of Mongolia (+2.44%) and Pakistan (+.66%) were the week’s outliers for posting positive returns defying the general sentiment.

This week’s risk-OFF mode appears to be a continuation of the general mood of the region’s equity market for the first semester of the year.

Of the 19 listed in Bloomberg, only 5 or 26.32%, have scored positive returns for the period: New Zealand (+6.49%), India (4.76%), Pakistan (+2.95%), Australia (+1.98%) and Taiwan (+1.82%).  

Equity bellwethers of the Philippines (-15.95%), China (-13.9%) and Bangladesh (-13.57%) were the main laggards for the period.

The Indonesian central bank has raised rates for the third time this year, last week, yet the rupiah fell by 1.4% this week. Down by 5.35% year to date, the rupiah appears to be fast catching up with the peso

Yes, I am reminded of relative returns. The PhiSYx (+25.11%) trounced the US-php (+.4%) in 2017. That was an enormous margin 24.71% margin in favor of the PhiSYx.

However, at the end of the June 2018, the USD php (+6.83%) almost caught up with PSYi 30 (-15.95%) for a margin of 22.78% in favor of the US php.

And given the gargantuan Php 181.1 billion of QE year to May, which is about half the size of 2016’s Php 341.5 billion, the peso is likely to fall faster when inflation gets a second wind.

Asian Crisis 2.0 Redux

Neither has this been about the Philippine peso nor the Indonesian rupiah, the best performing emerging market currency has weakened against the US dollar.

I mentioned last week that “current events reek of the Asian crisis”, I am not alone now as analysts from the Bank of Americasees an “eerily similar to the prelude to the Asian/LTCM crisis of 1998”. 

What seems to be happening has been liquidations which appeared in the peripheries (emerging markets) and has begun to spread into the core (advanced economies)

Figure 2

In contrast to 2013 where the global central banks eased in response to the taper tantrum, the reverse has been happening.

As developed economies have commenced on withdrawing liquidity or have begun tightening financial conditions, these actions have exposed internal fragilities such as inflation and the offshore (Eurodollar) dollar imbalances to send a scramble for US dollars and or abrupt closure of “carry trades” and or a stampede out of the emerging markets by foreign arbitrageurs.   

And if this dynamic persists or escalates into a sudden stop, it won’t be long before one or several of the emerging markets crack.

Hong Kong’s interbank rates (HIBOR) have been undergoing incredible liquidity stress which could be the reason why the yuan has been falling anew. Perhaps this may be about Hong Kong banks providing US dollar funding to Chinese banks whichhave turned haywire.

And worst, if Chinese economy implodes, so will the world.

Every crisis has been unique, though. However, if we are going to use the 1997 episode as a template, then the last semester could prove to be very interesting

The Asian crisis surfaced in July, six months after liquidations appeared.  I am not forecasting that this would happen in July. It may or it may not. It is immaterial.

Instead, since a lot of stock market crashes around the world has occurred in the windows of August to October, current financial conditions make the last semester of 2018 highly vulnerable to one.

The Second Semester is Vulnerable To Crashes

Figure 3

And in looking for fun in patterns, this year’s 15.95% decline broke a 10-year streak.

Except for 2008, the first semester has been favorable to the Philippine stocks or the Phisix. (It was legitimately a Phisix then) Because of another frail semester, losses in the first semester had been compounded to close the year in a deep red. And that was due to the Great Recession.

Meanwhile, first semester gains of 2013, 2015, and 2016 were either trimmed or reduced to losses by the end of the year due to the pronounced weakness in the second half.

That said, there has no consistent streak underpinning the last half. The common denominator has been the degree of price changes or volatility.

Of course, volatility may have been induced by excessive gains in the 1H or by changes in internal and external dynamics.

For this year, and the 2018 bear market cycle, the backlash from easy money policy and prodigious political spending have surfaced through politicized street inflation, an accelerated declining trend of the peso and spikes in treasury yields.

Unlike the previous bear markets were recovery had been based on the extension of easy money policies, the present strain has been upsetting its very foundations 

So for a full recovery to take hold, authorities would have to successfully reinstate a regime of easy money by clearing current obstacles.  

Good luck with that!

And no, minimum wages, endo and price controls won’t do that. Instead, these would accelerate the cycle’s death knell