Phisix 7,270: More Signs of Price Instability, JKSE-Phisix Correlations and the Global Reflation Trade

Global Markets Catches Up with the Phisix; Has the JKSE-Phisix Correlationship Been Broken?

With the ongoing furious race to milestone heights, some may wonder why the Philippine Phisix has hardly participated in the “risk ON” environment that has overwhelmed global equity markets.

For instance, the Indonesian JKSE has broken into fresh record highs the other week. And this week’s .48% gains furthered the JKSE’s distance from the breakout point.

For now, Indonesian President Widodo’s earlier harangue and harassment of equity bears seem to have succeeded. Mr. Widodo has used the stock market as a policy tool to spiff up the administration’s image at the expense of the functioning market [see earlier email -The Indonesian Government Wages War on Stock Market Bears and Interest Rates! Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2016]

Nonetheless, despite a slowing GDP and stagnating property prices*, since the Indonesian central bank (Bank Indonesia) cut policy interest rates for the sixth time in October 2016, such has incited the re-acceleration in loans to the private sector which was similarly reflected on the substantial rebound in the nation’s overall loan portfolio. Such jump in credit growth has likewise been manifested in the sharp escalation of money supply growth, seen via M2.

Taken together, a substantial portion of money injected into the financial system has only been rechanneled into domestic stocks from which have stirred a frenzied pump. And this has prompted for the recent fresh highs.

This exhibits how Indonesia’s stock markets have become another punter’s haven that has been detached from reality—largely bankrolled by easy money and by government’s intrusion in its stock market.

And this is the sort of dynamic that tells us why monumental history is presently unfolding…and not just in the context of record stocks, but of its aftermath.

*The Global Property Guide’s note on Indonesia’s 2016 housing prices (March 23 2017): “In Indonesia, residential prices in the country's 14 largest cities fell by 0.89% during 2016, after falling 0.2% in 2015. House prices fell 0.37% q-o-q during the latest quarter.”

Figure 1: ASEAN Equities Top, JKSE-PSEi Bottom

Back to the Phisix.

Given the present global conditions, the domestic benchmark has not underperformed.

Based on the year to date activities, the domestic bellwether has been almost at par with most the ASEAN’s equity benchmarks. Year to date, Indonesia’s record JKSE has delivered an inferior 5.11% return relative to the Phisix at 6.27% (as of March 24). The difference thus springs from the baseline effect—the Phisix began the year at a relatively lower base compared to JKSE.

This entails that the PSEi has outsprinted the rest of the field at the start of the year where the rest of the world has only been in a catch-up mode.

Yet the PSEi has spent over two months in a consolidation phase. Or it has been sauntering in a very narrow trading range (7,100-7,400) following the 9 day (engineered) meltup which occurred at the close of December through the first week of 2017.

Interestingly, the price trend dynamic of both the JKSE and the Phisix for the past two years or from 2014-2016 has revealed of amazing signs of synchronicity. Both yardsticks have essentially ascended and descended in seeming confluence. (see bottom figure 1). Or there appears to be a tight correlation for the noted benchmarks.

This convergent dynamic appears to have been broken only in the last two months.

JKSE’s record upside breakout came as the PSEi has forged what chart technicians call as a “flag formation”—a continuing pattern.

As a side note on flag formation: while the intermediate trend has been up, the originating trend has been down—so the 64 billion peso question is; continuation of what pattern? The answer lies on the observer’s bias.

Yet has there been a recalibration in the Phisix-JKSE correlationship? Or will there be a restoration of the previous convergence? If the latter on which direction?

More Signs of Price Instability

Here’s more.

Yet the present trading range has signified an outcome of rampant and relentless pumps and dumps.

End session pumps and dumps for the week totaled 55.56 points with 65% share accounting for as pumps and the remainder as dumps. The Phisix was down 1.03% or lower by 75.4 points. This entails the end of the week outcome has been immensely sanitized by price distortions borne out of such unscrupulous engineered price actions.

Figure 2: Stunning Amplification of Price Volatility

Such flagrant contortions can be seen in the escalating magnitude of volatility ensconced in the headline index.

The vast dispersion of gains and losses within sectors for this week has been astounding (lower left window). 

The property, financials and industrials stunningly cratered by 3.5%, 2.48% and 1.73%, respectively. Because their combined market weighting at 49.09% (18.35% financials, 17.31% property, and 13.43% industrials—as of March 24) was slightly lower compared than the gainers at 49.69% (holding 39.37% and services 10.32%), the latter group’s impact severely diminished the enormous losses of the former group. The holdings and the services jumped by .83% and .86% this week. The combined events resulted in the diminished 1.03% decline in the headline index.

It’s even fascinating to see a rare unanimity in the price activities of the property and industrials. All property and all industrial issues tumbled this week! The property sector: Ayala Land (-5.48%) SM Prime (-3.28%), Megaworld (-3.06%) and Robinsons Land (-2.31%). The industrials: food giants Universal Robina (-1.23%) and Jollibee (-2.69%), backed by power firms Aboitiz Power (-3.22%), First GEN (-.45%), EDC (-.66%), Meralco (-4.21%) and Petron (-1.1%).

On the opposite end, eight of the ten or 80% of holding issues were sharply up: AEV (+3.29%), LTG (+2.8%) AGI (+2.68%), AC (+1.81%), GTCAP (+1.56%), JGS (+1.17%), SMC (+.97%) and the largest member, SM (+.6%). Supporting the holding sector, three of the four services also boomed; TEL (+3.84%), GLO (+1.78%) and ICT (+1.67).

In perspective, furious selling occurred in the property and industrials, aside from the financials, but ferocious bidding transpired at mostly the holding sector supported by the services.

It can be deduced that foreign money was responsible for most of the selling pressures in the Phisix given the largest net selling at Php 3.34 billion since end December. In the meantime, the locals shored up the PSEi gainers through a rotation. That is, perhaps locals sold holdings at the broad markets to finance aggressive bids in select PSEi issues. The 16.14% decline in peso volume indicated of a retreat in liquidity which most likely meant that buyers weren’t able to meet the seller’s urgency to exit, hence the expanded price volatility. In addition, the significant deterioration in market internals for both the PSEi and the broader spectrum suggests that selling activities were not limited to the PSEi 30 basket (except again for a few heavyweights).

The question is why the colossal deviances in the weekly activities, particularly for the holding sector, when their major subsidiaries were under severe selling pressure? Has this been designed anew to stage manage the index?

Even more. 12 issues or 40% of PSEi members had price changes of 3% and above (in both directions). 17 issues or 57% had price changes of 2% and above (again bidirectional). 25 issues or 83.33% registered price changes of 1% and above! (lower right window)

And yes such incredible escalating volatility has been happening even as the Phisix has been drifting in a tight zone.

Most haven’t realized that these are signs of a seismic buildup in stressors or a symptom of intensifying price instability. It’s either we’d be seeing a breakout above 7,400 or a plunge to 6,500 in the near horizon. Or we could even see both.

Has the Reflation Trade Climaxed?

And here’s the thing.

Has the euphoric and ebullient US markets lost its footing to mark a significant top? As I suspected, strains from US dollar illiquidity has once again resurfaced to have impelled oil prices to tumble back below $50.[See Has the Fed “Fallen Behind the Curve”? March 11, 2017]

It would be interesting to see what happens next to oil prices?  Will it hold ground or flounder back to $45 or even below? If the latter should happen, then the reflation trade will almost certainly lose its shimmy. The question is how will this affect producers, creditors and fiscal conditions of producing nations

As for the US, will a reprise in the oil price debacle be now compounded by mounting woes in the US retail sector?

If the US stock markets flub, then just how will this affect the global risk ON scenario?

How will such reversal impact domestic stocks?

Interesting, no?

Interesting Pre- Trump Inauguration News: The Trump Duterte Secret Link as Foundation to Bilateral Ties? JP Morgan Capitulates to Widodo and Libertarian Xi Jinping?

Tomorrow marks Mr. Trump’s inauguration. Yet many fascinating unfolding developments.

Will this define US-Philippines bilateral relations? From Quartz (“Donald Trump is likely on the payroll of a Filipino government official thanks to his new Manila skyscraper” January 16, 2017)

The Trump Organization’s partners around the world have been seen as potential conflicts of interest ever since Donald Trump announced he was running for US president. With his inauguration just days away, more attention is being paid to these conflicts, and the head of the Office of Government Ethics insists that Trump must sell off his business in order to be an ethical president.

One of the most most glaring conflicts is set to open up this quarter: Trump Tower Manila, a 57-floor skyscraper inside Century City, in a gentrifying area of Manila’s business district. It’s a joint project with Century Properties Group, Inc. (CPGI), a Filipino real estate development company owned by Jose E.B. Antonio, who is also a special trade envoy to the United States. If the partnership between Trump and Antonio is structured like many of his other business deals, with Trump licensing his name in exchange for ongoing payments, Trump will essentially be on the payroll of a member of controversial Philippines president Rodrigo Duterte’s government.

While Trump has vowed to turn over the running of his business to his two sons, ethics experts say that isn’t enough to prevent potential conflicts of interest. Only by completely selling off his business will Trump match the ethics standards set by other presidents, and required of other employees of the executive branch of the US government.

I withhold from further extrapolation.

Speaking of conflict of interests, recall the Indonesian government’s war against stock market bears which I raised this weekend?

Well, JP Morgan made a volte face, which came to the delight of the Widodo government.

From Bloomberg (January 17):

JPMorgan Chase & Co. upgraded its assessment of the Indonesian stock market, reversing an earlier bearish call that prompted Jakarta to stop doing business with the U.S. bank.

The bank’s analysts raised their "tactical" view of Indonesian equities one level to “neutral” in a report dated Monday, saying volatility in emerging-market bonds following Donald Trump’s U.S. election victory in November should now subside. The upgrade came two weeks after Indonesia’s government cut business ties with JPMorgan, citing a two-notch equities downgrade by the bank in November.

“Our tactical downgrade two months ago was driven by the risk of Indonesia underperforming the Asia Pacific ex Japan and EM indices as investors de-risked," analysts led by Adrian Mowat said. "Redemption and bond volatility risks have now played out, in our view.”

Indonesia welcomed JPMorgan’s new assessment. The neutral recommendation is more in line with fundamentals, Coordinating Minister for Economic Affairs Darmin Nasution told reporters in Jakarta on Monday. The finance ministry had earlier said it would stop using JPMorgan as a primary dealer and an underwriter for sovereign bonds.

Such would signify a sterling example of the agency problem. Yes, this should be one for the textbooks.

Why? Because JP Morgan’s interests have been demonstrated to promote that of their political patron than that of their clients and or of the investing public. Or the latter will be sacrificed for the former.

Remember, the Indonesian government’s interest (access to cheap credit) is different than from the investing public (return on capital invested/savings)

So move aside fake news, like the Philippines, now we have "fake analysis", "fake prices" and "fake markets".

Next.

Here is an awesome quote from Davos (CNN)

We must remain committed to free trade and investment. We must promote trade and investment liberalization…No one will emerge as a winner in a trade war.

No, that wasn’t from a libertarian kook or from a classical liberal fruitcake. 

That was from China’s president Xi Jinping; the recently anointed ‘core leader’ of the ruling communist party which essentially puts him at par with Mao ZeDong and Deng Xiaopeng.

The communist 'core leader' used libertarian premises to defend globalization (against the incoming Trump regime)

How I wish that the intent has been as good as the rhetoric.

But sadly, since politics represents a smokescreen, this just hasn’t been so.

Proof?

Action speaks louder than words (or in economics ‘demonstrated or revealed preferences’)

From Reuters [Capital curbs push Chinese firms to risky, costly dollar bonds, January 17, 2017] (bold added)

China's efforts to support its currency and cool its hot property market are encouraging more Chinese companies, including many state firms, to take on extra cost and risk by raising foreign-currency bonds in Hong Kong and other offshore locations.

Despite the yuan's nearly 7 percent slump against the dollar in 2016, Chinese companies including state-owned Bank of China (601988.SS) raised a record $111 billion in offshore dollar bonds, according to data from Dealogic, up from $88 billion in 2015.

JPMorgan analysts, using their own dataset, are forecasting another rise this year, even though many economists expect the yuan to fall further, making the loans more expensive to service and repay.

The list includes issuers who need dollars to pay for overseas acquisitions and deals but are unable to use their yuan after China tightened its grip on capital outflows last year to support the currency.

"It's getting increasingly difficult to move money out," said Shen Weizheng, fund manager at Ivy Capital, which invests in stocks and bonds in Hong Kong. "So for Chinese companies eager to invest overseas, the dollar bond market becomes an easier funding avenue."

State firms are also doing so because the government has made it easier for them to tap offshore markets, and there is pressure on them to bring more dollars onshore, investment bankers said.

Some property firms have also been left with little choice but to raise money offshore as government measures to contain a property bubble have included lending restrictions onshore.

Both the Shanghai and Shenzhen stock exchanges have tightened bond issuance rules for real estate firms since October, and regulators have repeatedly urged Chinese lenders to restrict property lending.

Chinese property developers have $7.9 billion in loans falling due in 2017, according to Thomson Reuters data, which could push more into offshore markets if they need refinancing.

On top of the exchange risks, the borrowers also have to swallow much higher borrowing costs.

As one would note, the above represents the ramifications of Mr. Xi’s anti-libertarian regime characterized by the explosion of stringent capital controls.

Chinese firms including state-owned firms have been intensely leveraging up with US dollar liabilities overseas in response to such controls (law of unintended consequences), thus increasing balance sheet risks, US dollar shorts (currency risks) AND market risks despite the huge rally by the yuan. 

The yuan rally was more than in response to the drastic capital controls, it was further aggravated by Mr. Trump’s comments on the US dollar: “too strong…killing us” and on the yuan’s “dropping like a rock” “because they don’t want us to get angry.”

Shibor rates (interbank loan rates) have been going out of whack or have gone really berserk, despite record injections by the PBoC!

 

No such has hardly been about holidays. Shibor rates have been soaring since 4Q 2016!

Capital controls signify an assault on property rights. Or such political controls denotes of the limitations of choice on one’s property. Such include, sending money overseas, investing overseas, conversion to foreign exchange for household or corporate savings, choices on the assets to own (domestic or international), constraints on trading activities and more (slippery slope controls, eventually social controls).

Such proscriptions also represent FORCED choices on the path of actions for the public or actions restricted to which the government wants or desires.

Indirectly, capital controls serve as protectionist tool—it is intended to safeguard the interests of the Chinese government at the expense of its citizenry, as well as exogenous forces. Of course, again, this is channeled through the implicit confiscation (financial repression) or redistribution of assets owned by the public for the benefit of the powers-that-be.

Sadly protectionism signifies the de rigueur geopolitical and domestic trend, that’s even before the advent of Trump administration!