Phisix 7,820: 100% of The Week’s 1.53% Advance from Marking the Close, More Tremors Rock China’s Financial Markets

Phisix 7,820: 100% of The Week’s 1.53% Advance from Marking the Close, More Tremors Rock China’s Financial Markets

As More Tremors Rock China’s Financial Markets, ASEAN Stocks Rose

Up by 1.53%, the PhiSYx was one of Asia’s outperformers.

What’s surprising has been the divergence in the performance of China and ASEAN.

Figure 1

More importantly, repeated tremors in the Chinese financial markets could be a precursor to a major financial quake.

To stem the intensifying weakness, the Chinese central bank, the People’s Bank of China (PBoC) raised abruptly to 20% the reserve requirement on foreign currency forwards which increases the cost of shorting the yuan. The yuan rebounded by 1% from the intraday lows last Friday, but still closed down by .2% this week.  The PBOC first used the reserve requirements to prevent the yuan’s slide in October 2015. However such short-term fix measure failed to arrest the yuan from falling

This week’s currency intervention signifies a followup from the previous announcement by the Chinese government to implement a USD 199 billion fiscal stimulus that had been supported by substantial liquidity injections by the PBoC (USD $73.9 billion).

Pressures in the currency market sent China’s equity markets reeling. The Shanghai Composite plummeted 4.6%.

Aside from the Philippines, ASEAN bellwethers led by Vietnam (+2.57%) Thailand (+.6%), Indonesia (+.31%) and Malaysia (+.62%) provided the cushion to the selling pressures in the region.

On the other hand, Singapore (-1.78%) and Laos (-.54%) joined the majority lower. Only eight of the 19 national bourses in the region closed up. The average weekly return for the group was a -.364%

The US-China trade war can’t explain sufficiently the ongoing strains in China’s financial markets.

Given ASEAN’s supply chain and financial linkages, the divergence in the performance in their financial assets suggests that China’s underperformance may signify a domestic issue, or that convergence may occur eventually, with either ASEAN or China closing the gap.

China and ASEAN equity markets exhibit tight correlation for the past year.

China’s Shanghai Composite (red), the Philippine Phisix (blue), and Indonesia’s JKSE (green) almost topped simultaneously in late January. However, both Indonesia and the Philippines broke their downtrend lines recently, whereas the Shanghai index seems on the path to test its July lows.

Last week, the Chinese government announced its second round of $60 billion set of retaliatory tariffs against the US. They also vowed to reciprocate to an additional $200 billion tariffs which the US government threatens to impose against them. 

Will US President Trump’s The Art of Deal, backed by intensifying domestic economic and financial pressures, push the Chinese government into the negotiation table?  Or will trade walls or barriers become a reality?

 

Figure 2

And financial tremors haven’t been limited to China. Despite offers by the Bank of Japan to up to 400 billion yen of Japanese Government Bonds (JGBs), yields of 10-year rose. The Italian equivalent has also been rising.

100% of The Week’s Advance from Marking the Close, Price Instability Haunts Philippine PMI, GDP Week

The most interesting aspect is how the PhiSYx attained its weekly position.

 

Figure 3

End session pumps accrued to a stunning 186.9 points or 2.42% of the benchmark’s value as of July 27. Since the headline index was up by 1.53%, this means that week’s entire gains had been from those engineered price fixing.

Without them, the PhiSYx may have been down. This tells us of the artificiality of prices which implies the magnitude of distortions.

Yes, three issues, AEV, SM and Ayala Corp, were responsible for the about 60% of the 1.53%.  These issues were primary beneficiaries of the massive closing session pumps of the week. Because only 2 of the top 6 issues gained market cap share, their combined share fell to 51.19%. Aboitiz Equity Ventures reported that its net income dropped 6% and 2% in the 2Q and 1H. Maybe dwindling net incomes have been seen as a good thing.

Its 17Q-Financial Statements have to be published yet.

 

Figure 4

Here is an interesting take from the Markit on July’s Philippine manufacturing conditions. The company always attempts to put up a positive spin on their surveys. But this time, there is no escape from the price instability brought about by the BSP actions, which has been aggravated by TRAIN 1.0

The seasonally adjusted Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI™) slipped from 52.9 in June to 50.9 in July. The latest reading was the lowest for five months and represented only a marginal improvement in the health of the sector…

There were signs of softening demand at the start of the third quarter. New business intakes increased at the weakest pace in the survey history despite a strong pickup in overseas sales. Growth in new export orders reached the fastest in just over one-and-a-half years. Slower sales led firms to scale back their production volumes. Output growth reached a six-month low. That said, there was anecdotal evidence that input shortages disrupted production activity.

Might slower sales come from the previous panic buying in anticipation of rising prices?

In response to softer demand, firms acquired inputs at a slower rate. Purchasing activity expanded at the weakest pace for six months which, in turn, contributed to a mild rise in input inventories. Suppliers were able to improve on their performance. Shorter delivery times were reported for the first time since March, though the gain was marginal overall.

IF input shortages disrupted production activity, why would purchasing activity expand at the weakest pace? Had these not been due to “softer demand”?  

Slack remained in the Philippines manufacturing sector during July, as evidenced by an ongoing decrease in backlogs of work. The latest decline in the level of unfinished business was the steepest for ten months. Spare capacity weighed further on hiring. Lower payroll numbers were registered for a second straight month in July. However, voluntary leavers were commonly cited as a reason.

So manufacturing shed jobs despite the recent spurt.

Inflationary pressures in the sector remained marked. Higher prices for raw materials, such as diesel, plasticsand rice, a weaker peso and effects of the TRAIN regulations all contributed to input cost inflation, which remained well above that seen in recent years. Greater cost burdens led firms to raise selling prices further in July. While still elevated, business expectations relating to output in the year ahead fell to the lowest in the survey history.Where optimism was recorded, new products, higher sales forecasts, solid construction activity, planned business expansions, and increased marketing efforts were all reported as reasons

Has the law of demand (as the price of the goods increased, quantity demanded decreases) been influential in the softening of sales and output? Have the clients of these firms overstocked in response to previous anticipations of higher prices?

Has reality begun to pervade on the previous bullishness or optimism of manufacturers?

Have actions of the manufacturers contributed to slowing M3?

Surveys are mostly driven by perceptions, sentiments, and egos than by real events.

In closing, aside from the BSP, 2Q GDP will be announced on August 9.

Ever since 2015, pre-GDP week typically experiences wild swings.

What makes 2Q GDP interesting is President Duterte’s June comment that the “economy is in the doldrums”. Of course, the statistics is economics crowd like Moody’s projects 2Q GDP lower at 6.6%. The PSYEi 30 two-week return of 5.61% suggests that 2Q GDP may outperform. Have these been speculation bolstered by insider info?

GDP has been pillared mostly by surveys which serve as inputs to econometric models. And that’s the reason for the deluge of positive spins.

Has the recent spurt in inflation caused a dampening in sentiment that may affect GDP?

PhiSYx Surged 4.1% on Heavy Pumps and Dumps, Philippine Treasury Yields Spike Anew to Multi-Year Highs, China Launches Economic Rescue Package!

In this issue

PhiSYx Surged 4.1% on Heavy Pumps and Dumps, Philippine Treasury Yields Spike Anew to Multi-Year Highs, China Launches Economic Rescue Package!

-PhiSYx Soared 4.1% on Heavy Pumps and Dumps

-Market Share of Sy-Ayala Group Bulges to 51.83% of the PSYEi 30!

-The Making of the Chart Patterns, Treasury Yields Spike Anew to Multi-Year Highs

-External Risks: China Launched Massive Economic Rescue Package; Bank of Japan Fights Rising Yields and Plunging Facebook and Twitter Stocks

PhiSYx Surged 4.1% on Heavy Pumps and Dumps, Philippine Treasury Yields Spike Anew to Multi-Year Highs, China Launches Economic Rescue Package!

PhiSYx Soared 4.1% on Heavy Pumps and Dumps

This week’s 4.08% advance by the headline index, the PhiSYx, marks the second biggest since the first week of January 2017 (+5.96%). The frenzied advance of January 2017 highlighted the reversal of the bear market. Will this week’s advance resonate? Or will this be a bull trap?

Well, how was this accomplished? That’s the most significant question eluded by everyone.

 

Figure 1

And the answer has been provided by the above.

It is a week characterized by unfettered and flagrant pumps and dumps. In fact, July 25 recorded the biggest ever pump and dump!

On that day, following a frantic intraday pump, a stunning 97.22 points or 1.2% was shed from the end session dump! That day’s dump, possibly enraged the price fixers, that incited a panic buying, mostly on SM group of companies, to record a marvelous +2.02% gain in the next day or in Thursday, July 26. SM closed with 3.86%, BDO +1.85% and SMPH 3.31%. SM and BDO were major beneficiaries of marking the close pumps. The heavyweights of the Ayala Grop closed with lesser intensity: ALI +.86%, AC +1.66%, and BPI +.71%

And because losses may inspire a revival of selling, price fixers ensured that the Friday session would close in the positive, thus the relentless bid on market heavyweights to push the index 121 points up, 64 points or 52.9% from a mark the close pump.

Cumulative Pumps and Dumps for the week amounted to 259.54 points or a staggering 3.5% of the other week’s close!

Market Share of Sy-Ayala Group Bulges to 51.83% of the PSYEi 30!

Figure 2

SM contributed to a shocking 25% share of headline index’s astonishing advance. (topmost pane, Figure 2) Along with SMPH and BDO, gains of the SM group accounted for a 38.9% share of the forced inflation of the PhiSYx. Meanwhile, the Ayala heavyweights delivered 26.5% share of the gains in the headline index.

As a result from the SM-Ayala pumping, the top 5 issues have accounted for a record 45.85% share of the PhiSYX. Add BPI to the equation, a whopping 51.83% share of the index has been corralled by 6 companies. SIX companies make up the MAJORITY of the PSYEi 30!  

Thus, it would be a big mistake for anyone to see the index as representative of the 30 issues.

And as the years progressed, enabled and facilitated by the serial pumps, the market cap share of the index has accrued towards these companies, particularly on the SY group.

Such represents the monumental scale of mounting imbalances from the serial price fixing.

The Making of the Chart Patterns, Treasury Yields Spike Anew to Multi-Year Highs

Though this week’s average daily volume of Php 5.86 billion signified a 52.3% improvement from the January 2014 levels reached last week, it was about 19.5% lower compared to January 2017’s Php 7.28 billion. Price manipulations have been drained volume away from the general market.

Technically speaking, this week’s forced advance has powered the index above the broken secular trend lines of 2009 and 2012. Though at first glance this would look bullish, the damage from such trend violations has been critical and needs further less aggressive progress to be convincing. (bottom pane, figure 2)

And chart patterns depend on the spontaneity of the markets and not from the gaming of it.

And as I have repeatedly pointed out here, vertical price actions implies that Newton’s third law of motion (For every action, there is an equal and opposite reaction) will eventually take place, as it has in the past secular cycles.

Bear markets are merely symptoms of such a process. While interventions have managed to delay to the day of reckoning, it has caused imbalances to expand and accumulate only.

Of course, various interest groups want to see stock markets rise perpetually. The GSIS, for instance, bragged about a 69% jump in net income in 2017 mainly from stock market gains.

So the incentives to participate in price fixing may come from interest groups which depend on sustained inflation of the stock market.

Be reminded that the PhiSYx returned 25% in 2017 even when its aggregate net income grew by only 4.21% while market cap based net income grew by 8.43% only over the same period.

That is how detached the domestic stock market has been with reality.

 

Figure 3

And such orchestrated panic buying of index heavyweight stocks has taken place as local currency treasuries have been pummeled

LCY yields have skyrocketed to multi-year high levels on short to the middle curve. And rising yields/falling prices comes even as the BSP has been managing the bond markets. (figure 3)

These stock market pumps have emerged as if rising yields will have no impact on financing costs of heavily leveraged firms like SM and Ayalas, on aggregate demand and on competition for access to savings.

External Risks: China Launched Massive Economic Rescue Package; Bank of Japan Fights Rising Yields and Plunging Facebook and Twitter Stocks

And what’s even more striking has been ongoing pressures endured by our neighbors.

I have been saying here that China’s markets have been undergoing severe stress. [Asian Crisis 2.0 Watch: The Second Semester is Vulnerable To Crashes, The PhiSYx Syndrome, July 2, 2018]

The actions by the Chinese government last week have affirmed my view.

China’s State Council announced an enormous fiscal stimulus worth 1.35 trillion yuan (USD $199 billion) intended for infrastructure spending for local governments.

 

Figure 4

Meanwhile, to ease credit pressures and to encourage credit flows into small and medium enterprises, the PBoC injected 502 billion yuan (USD $73.9 billion) of cash into the banking system.

While interventions by the Chinese government helped spur a vigorous rally in risk assets throughout Asia, yields of benchmark10-year Japan Government Bonds (JGBs) spiked to the proximity of 1-year highs despite the aggressive interventions by Japan’s central bank, the Bank of Japan (BoJ).

It stands to reason that intensifying strains in the economy and the financial system have compelled the governments of China and Japan to undertake rescue packages which stock markets have bet that these measures would work.

What if they won’t? What if the imbalances have reached a critical mass from which stimulus would do little to alleviate such pressures from finding an outlet valve?

The Shanghai Composite closed by up by only 1.57%, following 2-days of pullback. The stimulus incited a substantial rally in Chinese equities, but it appears that the upside momentum may have lost steam.  

And the stimulus aggravated only the yuan’s decline. The USD dollar CNY charged to a one year high.

Across the Pacific Ocean, plunging stocks of technology mainstays of Facebook and Twitter which had been primary drivers or anchors of the recent record rally may also presage the surfacing of risks. Facebook, Amazon, Netflix, Google and Applecomprise 10.6% share of the S&P 500, while the S&P technology index accounts for 23%.

At the end of the day, risks won’t be wished away by the manipulation of markets.

Let me close with a quote from a recent speech by BSP Chief Nestor A Espenilla, Jr

In the BSP, we affirm that good governance is not just about compliance with laws and regulations.  Rather, good governance must frame and ground our intent so that our actions, initiatives and policies add value.  Good governance results in breakthroughs in the effective delivery of our mandates of maintaining price stability, financial stability and an efficient and safe payments system.

Pls. go back and look at figure 1.

Does the BSP think that the tolerance of market manipulations represents ‘good governance’ that ‘may add value’ and enhance or ‘maintain financial and price stability’?

Nestor A Espenilla, Jr: Good governance in the pursuit of mandates BIS July 17, 2018