Melt-Up! Philippine Financial-Bank Index Hits a Milestone High!

 

Causa remota of any crisis is the expansion of credit and speculation while causa proxima is some incident that saps the confidence of the system and induces investors to sell commodities, stocks, real estate, bills of exchange, or promissory notes and increase their money holdings. The causa proxima may be trivial: a bankruptcy, a suicide, a flight, a revelation of fraud, a refusal of credit to some borrowers, or some change of view that leads a market participant with a large position to sell. Prices fall. Expectations are reversed. The downward price movement accelerates—Charles P. Kindelberger 

In this issue

Melt-Up! Philippine Financial-Bank Index Hits a Milestone High!

I. US Banks Powered Global Financials ETF to a Record High!

II. Melt-up! The Philippine Financial-Bank Index Carves a Fresh All-Time High!

III. Tightening, what Tightening? Finance Outperformed the PSE Since 2020, Banks Centralize Financial Resources

IV. The Paradox of Financial and Real-Estate Performance; Year-To-Date Performances of Listed Banks

V. Record Financial Index: From the Perspective of Volume and Foreign Money Flows

VI. Cross-Border Leveraged Speculation Powered the Record High of the Financial/Bank Index

VII. Bank Borrowings in a Melt-UP Phase too! Conclusion

Melt-Up! Philippine Financial-Bank Index Hits a Milestone High!

The share prices of many Philippine banks have been in a melt-up. But what’s been driving this surge?

I. US Banks Powered Global Financials ETF to a Record High!

Thanks to the extraordinary loosening of financial conditions, which has spurred booming credit and stock market activity, some of the top U.S. banks reported exceptional performance in Q3 2024 last week.

As a result, share prices of Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) soared to all-time highs.

In turn, BlackRock’s iShares Global Financials ETF, the IXG (NYSE ARCA: IXG), which has been on an uptrend since the lows of October 2020, also reached a fresh record high after surpassing its previous peak set in 2007.

The IXG's portfolio consists of 209 global equities primarily in financial services and banking, with over 55% of its holdings in US markets. This week, the IXG surged 2.25% and has generated a 26.13% return in 2024 (as of October 18).

Figure 1

Financials ranked fourth among the best-performing sectors in the S&P 500, with a 26.5% return, trailing Information Technology at 33.25%, Utilities at 29.3%, and Communications at 28.3% (as of October 18). [Figure 1, topmost table]

Despite the backdrop of supposedly high interest rates, October 2022 marked a turning point for the financial sector. This followed the Bank of England’s (BoE) intervention to rescue its troubled pension funds during the selloff of UK bonds.

The subsequent bailout of U.S. banks during the 2023 crisis further emboldened speculative activity, as central bank interventions have created what many view as a "moral hazard"—the belief that central banks will always step in to support the markets.

Expectations of easing by the Federal Reserve and other central banks have fueled the blistering rise of the IXG. The rapid pace of this ascent bears an unsettling resemblance to the 2007 episode, which preceded the Great Financial Crisis (GFC). [Figure 1, middle image]

II. Melt-up! The Philippine Financial-Bank Index Carves a Fresh All-Time High!

What does this have to do with the PSE?

The PSEi 30 closed the week ending October 18th up 1.44%, pushing 2024 Year-to-Date (YTD) returns to 14.97%.

Leading the gains this week was the Financial/Bank Index, with a 3.5% spike, followed by the Property Index, which climbed 2.11%.

The strong performance of the banking and property sectors supposedly reflects the Bangko Sentral ng Pilipinas' (BSP) announcement of its second round of rate cuts, effective October 17.

With this week’s surge, Financials have swiftly secured the second spot YTD with a 39.3% return, closing in on the ICT-led Service Sector, which holds the top position with 40.7%.

Since the PSEi 30 hit its June 2021 lows—mirroring trends in the U.S.—financials have sprinted ahead of other sectors. The Financial Index returned 29.9%, followed by the Property Index at 25%, both contributing to the PSEi 30’s overall 20.4% gain over this period. (Figure 1, lowest graph)

Figure 2

Here’s the thing: the Financial/Bank Index set a new record last September, surpassing its January 2018 high of 2,325.65. In a parabolic fashion, similar to global markets, the financial/bank index decisively reinforced its end-September breakout with this week’s push to 2,421.6. (Figure 2, topmost chart) 

Once again, China Bank’s incredible vertical rise is unprecedented, showcasing price volatility that is unbecoming of traditional banks. (Figure 2 middle chart) 

As previously pointed out, similar to the Lehman episode, skyrocketing prices tend to disguise underlying problems. 

In essence, the parabolic rise of financials hardly indicates a healthy bull market. If history serves as a guide (as seen in 2012 and 2018), this could be a sign of an interim top. 

Or could this time be different? 

III. Tightening, what Tightening? Finance Outperformed the PSE Since 2020, Banks Centralize Financial Resources 

The Financial/Bank Index currently consists of eight constituents: seven banks—Asia United Bank [AUB], BDO Unibank [BDO], Bank of the Philippine Islands [BPI], China Banking [CBC], Metrobank [MBT], Philippine National Bank [PNB], and Security Bank [SECB]—and one non-bank entity, the Philippine Stock Exchange [PSE].

Three of the bank members in the Financial Index are also part of the PSEi 30 composite, with two of them ranking among the top five.

While recent mainstream discussions have focused on how banks benefit from the liquidity injections via significant Reserve Requirement Ratio (RRR) cuts, and BSP rate cuts, the Financial Index has been outperforming the PSEi 30 since 2020. (Figure 2, lowest diagram) 

This trend began when the BSP implemented historic measures to support the industry, including quantitative easing (QE), rate cuts, RRR cuts, and relief measures.

This indicates that current dynamics represent a continuation of an underlying trend.

Figure 3

The BSP’s Total Resources of the Financial System (TRFS) data reveals that not only is it outgrowing GDP, but the share of banking resources—particularly from universal commercial (UC) banks—has been driving most of this growth. Philippine bank and UC bank share of the TRFS accounted for 83.4% and 78.05% last August. (Figure 3, topmost window) 

This highlights a concentration of resources and a deepening dependence of the economy on bank credit and liquidity. Thus, when officials claim they are promoting capital markets, it only holds true if banks benefit from it. 

Ironically, despite previous rate hikes, the TRFS suggests there has been little actual "tightening" or "restrictiveness" in the system. 

The outperformance of the Financial/Bank Index further confirms this. Yet, even with the availability of public data, discussions surrounding these insights are often sparse. 

IV. The Paradox of Financial and Real-Estate Performance; Year-To-Date Performances of Listed Banks 

In contrast, despite the substantial rebound in the Property Index from June 21 through September, it has yet to break its pattern of underperformance relative to the PSEi 30. (Figure 3, middle graph) 

These divergent trends suggest that, regardless of the measures undertaken by the BSP, the property sector remains hindered by internal challenges. 

In fact, contrary to most predictions, low interest rates have contributed to the real estate sector's struggles. As the BSP eased monetary policy over the past decade, the sector's value-added share of GDP fell to recent all-time lows—an indication of malinvestment. (Figure 3, lowest chart)

Figure 4 

Still, the Year-to-Date (YTD) performance of all listed banks, which has averaged a return of 27.08% as of October 18, has been skewed in favor of the banks that are part of the financial/bank index. (Figure 4, topmost image) 

Rocketing stock prices of Financial Index members AUB and CBC have delivered impressive YTD returns of 91.3% and 94.59%, respectively. (Figure 4, middle visual) 

Meanwhile, PSEi 30 mainstays BDO, BPI, and MBT produced returns of 25.7%, 37.9%, and 56.5%, respectively. SECB also saw a solid return of 36.5%. 

Have CBC and AUB struck a "gold mine" that the market has only recently discovered? 

V. Record Financial Index: From the Perspective of Volume and Foreign Money Flows 

Volume and foreign money flows offer another perspective.

Although the PSEi 30 briefly surged past 7,500 before retreating, trading volume remains relatively sluggish.  (Figure 4, lowest graph) 

But that’s only part of the story. 

What remains less known to many is that despite this overall lethargy, financials and banks have captured the bulk of the trading volume or a significant portion has been concentrated in financials and banks. 

The BSP and PSE have yet to release transaction data for August and September.

Figure 5 

However, using July data, the 7-month share of financials' volume relative to total market volume reached an all-time high of 23.7% in 2023. It has since retreated to 19.1% this year, the second-highest on record. That number, however, could reach a new high in October. (Figure 5, topmost image) 

As of October 18, the financial sector's share of gross trading volume had soared to 26.5% (and its share of mainboard volume to 29.6%). 

In other words, the financial/banking sector has absorbed about a quarter of the PSE's sluggish trading volume! That’s an astonishing level of concentration risk—Incredible! 

Given my limited access to sophisticated database organizing tools, I have only managed to tabulate foreign flows using October data, which is limited to the top five Financial Index members: AUB, BDO, BPI, CBC, and SECB. 

There is no question that these top five banks dominate the turnover share, accounting for 90.7% during the week leading up to October 18 and 84.8% for the entire month of October. 

VI. Cross-Border Leveraged Speculation Powered the Record High of the Financial/Bank Index 

But here are some additional insights: 

Net foreign inflows of Php 892.5 million for the top five banks represented 20.94% of the Php 4.261 billion total foreign inflows for October.

Notably, a substantial portion of this, accounting for 87.8% or Php 953.2 million, originated from last week alone, out of a total inflow of Php 1.086 billion.

In short, the recent surge to a record high in the Financial/Bank Index was largely driven by foreign capital, likely bolstered by the "national team" (such as the treasury departments of banks, Maharlika SWF and other financial corporations or OFCs?).

Stunning.

It’s looks likely that some of the foreign money chasing the U.S.-based IXG (iShares Global Financials ETF) rally has been positioning itself in emerging market banks like those in the Philippines. 

What we are witnessing appears to be unadulterated, leveraged speculative cross-border allocations, primarily focused on banks and, to a lesser extent, communications companies (telcos). [See returns of S&P 500 sector above] 

Further, the PSEi 30’s weekly breadth was overwhelmingly positive, with 19 of the 30 issues gaining and three remaining unchanged, averaging a 1.43% increase—almost mirroring the index’s actual weekly return of 1.44%. Two stocks, Meralco and Century Pacific Food (CNPF), hit all-time highs this week. (Figure 5, middle chart)

Weekly gains in the three banks contributed significantly to the PSEi 30’s performance. These banks accounted for 22.6% of the index, while the top five heavyweights—two of which are banks—commanded over half (50.83%) of the PSEi 30 as of October 18. (Figure 5, lowest pane) 

VII. Bank Borrowings in a Melt-UP Phase too! Conclusion

Before we conclude, as we await the PSE and the BSP to release September and Q3 data on individual banks and the overall banking system, it is noteworthy that some banks, such as PBCOM and PNB, have recently announced plans to raise funds through debt issuance in the capital markets.

Figure 6

It’s not just share prices that are surging—Philippine banks are also experiencing a sharp increase in borrowing—bonds and bills soared 32.3% in August. (Figure 6, topmost and middle graphs)

Why the rush to raise funds?

The answer lies in the ongoing deterioration of liquidity within the banking system, as indicated by declining cash-to-deposit and liquid-assets-to-deposit ratios. (Figure 6, lowest chart) 

The pressing question is: How will banks continue to fund the government under these conditions? The BSP’s response: Cut their Reserve Requirements, unleash liquidity! 

To wrap up, what you see in the media or mainstream discourse often doesn’t reflect the full picture. 

 

Will Share Prices of Global Banks Breakdown Together?

 

What he forgot to add is that inflation must always end in a crisis and a slump, and that worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of “capitalism”—Henry Hazlitt 

 

Will Share Prices of Global Banks Breakdown Together? 

 

The index of stocks of Europe’s banks broke down to a record low last week, amplifying risks of the doom loop.  

 

The doom loop, according to SWFI, “In the context of economics, a doom loop is a negative spiral that can occur when banks hold sovereign bonds and governments with weak public finances bail out such banks. European area governments are growing concerned about the doom loop between large banks and governments. Governments are exposed to bank risk, as well as banks are exposed to sovereign risk by holding government bonds in their portfolios. Other names for the doom loop include the “diabolic loop” and “vicious circle”.” 

 

Interestingly, shares of the US counterparts (the KBW Index  or the BKX), which barely participated in the recent record run by its key indices, weakened too… 

 

Banks provide the core of financing in Europe compared to the US, which increasingly relies on capital markets.  

 

The fragility of shares of banks encompasses Japan’s Topix Bank Exchange Index as well as Hong Kong’s Hang Seng China H Financial Index, which incidentally has been adrift close to the support, or multi-year level low levels. 

  

COVID and its political responses have not been responsible for the structural vulnerability of bank shares. Instead, the trend has been enhanced and accelerated by it. 

 

And the near synchronous price actions exhibit the structural interconnectedness brought about by financial globalization that comprises the offshore dollar (Eurodollar) system.  

 

Of course, because the domestic banking system interacts with its global peers, and which underlying financial and monetary policies, likewise, resonate with them, the share prices of local banks manifest the same infirmities. The PSE financials are, like their brethren, also ambling at multi-year lows. 

 

Will global bank shares breakdown together? 

 

Decoupling, anyone?

 

Has the Phoenix Risen? Gold Prices Barrels Through $1,400, a Six-Year High; Be Bullish on Gold Mines!

Has the Phoenix Risen? Gold Prices Barrels Through $1,400, a Six-Year High; Be Bullish on Gold Mines!

No international agreements, no diplomats, and no supernational bureaucracies are needed in order to restore sound monetary conditions. If a country adopts a noninflationary policy and clings to it, then the condition required for the return to gold is already present. The return to gold does not depend on the fulfillment of some material condition. It is an ideological problem. It presupposes only one thing: the abandonment of the illusion that increasing the quantity of money creates prosperity—Ludwig von Mises, Economic Freedom and Interventionism

Gold Prices Soar to 2013 Highs: Expectations of Fed’s Easy Money Policies?

From the CNN: Gold bugs are finally having a moment. The price of gold topped $1,400 an ounce Friday. That's the highest level since September 2013. The price of gold is now up nearly 10% this year. Gold has gained momentum thanks to expectations of a rate cut by the Federal Reserve as soon as next month. Rate cut hopes have helped push the dollar lower -- and gold tends to rally when the dollar gets weaker because that makes it more attractive to foreign buyers.

From AFP/Philstar: The Federal Reserve opened the door to an interest rate cut on Wednesday, vowing to act to keep the economy growing as uncertainties about trade and other issues mount. US Federal Reserve chief Jerome Powell said trade friction and slowing growth worldwide have led many central bankers to feel the case for an interest rate cut has "strengthened" but most still want to see more data before making a move. But one policymaker dissented in the vote, advocating for an immediate cut -- something President Donald Trump has been calling for loudly and which many economists say is necessary given the damage done by the escalating trade frictions. Hasn’t the decade long growth of US economy been the longest. (bold added)

The US is poised to register the longest economic expansion on record next month, but by far has been the weakest.  Powell’s Fed just raised policy rates last December, and now they’re contemplating cuts, why?  Because US Federal Reserve chair Jerome Powell accommodated on the wishes of US President Donald Trump who threatened to him with demotion?

And why a turnaround from ECB’s Mario Draghi who proposed to "cut interest rates again or provide further asset purchases if inflation doesn’t reach its target"?

Didn’t US President Trump throw the gauntlet of the risk of a currency war by accusing ECB’s Draghi of “currency manipulation” for announcing the likelihood of ECB’s monetary easing?

Wouldn’t these imply an escalation of policy uncertainty for the global economy, aside from trade friction?

The Panic Bid on Global Treasury Markets!

And why the panic bid over global bonds?

Figure 1

The global stock of negative yielding bond exploded to $13 trillion by the end of the week, backed by a one-day record flow of $700 billion! (figure 1, top window)

It’s been a race to the lowest yield for global bonds. (figure 1, middle window) Why?

The global money supply is at a record high but in the context of the US, money supply expansion has led to lower monetary velocity, depressing statistical inflation, and the estimated economic output.  (figure 1, lower window)

Has the global money supply expansion been reflecting the escalation of financial repression; inflating asset prices and debt stock coming at the expense of the real economy?

Has the panic buying of global bonds been symptomatic of an escalation of deflationary expectations?

And or, have the global fixed income community been front-running global central banks in expectations of a coming financial bailout through the revival of large scale asset purchases (LSAP) or quantitative easing (QE) via massive bond buying?

Has moral hazard become deeply entrenched to have plagued the global fixed income markets?

And if the fixed income markets expect global central banks to respond aggressively to a sharp deterioration of economic conditions, why has the stock market diverged from this perspective?

Have financial markets become utterly dysfunctional from frequent backstops, manipulations and interventions?

Have financial markets been so enamored or mesmerized by the perceived power of the central banks to stabilize financial and economic conditions? (the Halo effect)

And have financial markets been kept blissfully blind from the escalating entropy of the real conditions?

As Doug Noland of the Credit Bubble Bulletin aptly puts: “Today’s prescription for unstable markets and finance: more monetary stimulus. For unstable economies: more monetary stimulus. For inequality, trade wars and geopolitical uncertainties: much more monetary stimulus.”

Soaring Gold and Treasury Prices: The Liquidity And Fear Trade

Have the Fed-led global central banks been truly in control of the markets?

Figure 2

Yield curve inversions have afflicted not just the US treasury markets such as the 10-year 3-month and the 10-year Fed Fund Rate, but also the US Libor curve, and the Eurodollar futures.

Haven’t these been indicative of TIGHT monetary conditions?

And hasn’t the collapse of the spread of 10-year Fed Fund been a dynamic even before Trump’s “trade wars”?

Figure 3

And what just happened to the Fed’s floor system? The Effective Fed Fund rate has been drifting ABOVE the Interest on Excess Reserve (IOER) since April, the latter which is supposed to serve as a ceiling. (figure 3, top window)

And why have primary dealers have been massively hoarding US treasuries? Have collateral issues been intensifying? Have surging gold prices been a manifestation of an ongoing rapid depletion of liquidity, through a growing scarcity of collateral (rising repo fails), to inspire “fear trades” in both gold and government treasuries? (figure 3, middle and lower windows)

Has the volte-face of the FED been from these liquidity risk factors?

Why have these occurred if the Fed and central banks have been in control?

If so, has gold been pricing in magnified risks of a global economic and financial shock?

To add, geopolitical risks have been mounting.

For instance, though US President Trump had second thoughts to bomb Iran, in retaliation to Iran’s downing of US drones, he ordered a cyber assault on Iran’s military facilities instead. Bombs struck two oil tankers from unknown sources in the Strait of Hormuz, but the US government lays the blame for this on Iran. And this may be another reason for Trump's aborted bombing. The Indian government sent warships to protect its shipping interests.

Hong Kong’s mass protest against the extradition bill had blamed by the Chinese government on Western interference.

The Italian government desires to control its central bank by asking for legal powers to make the appointments of the members of the Bank of Italy.

Which will be proven right in a not so distant future (perhaps 2H of 2019?), the Gold-Treasury Fear Trade or the Risk-ON Equities?

Gold Price Ramp in Other Currencies, Philippine Peso Based Gold Prices Approach Record High

Figure 4

Gold prices in USD crossed the 1,400-threshold for the first time since September 2013.

Surging gold prices have become apparent everywhere.

Gold prices in the Philippine peso (upper window) soared to 2012 highs and may be testing the all-time 2011 peak soon.

Meanwhile, gold prices in the Malaysian ringgit (lower left) and the Indonesian rupiah (lower right), among the many others, raced to new records.

Though the USD will remain the benchmark against gold, individual currencies will perform distinctly relative to gold.

An uptrend in gold prices should manifest in most currencies.

Mining Investments: Be Fearful When Everybody Is Greedy And Greedy When Everybody Is Fearful!

From an investment/market point of view, global gold mining stocks were on fire this week.

Figure 5

The FTSE Gold mines surged 7.6% this week and posted a 21.58% return for the year. (Figure 5, upper window, from US Global Investors)

Meanwhile, the NYSE Gold Bug Index (HUI) soared 9.35% over the week, constituting almost half of its 18.31% 2019 return.

The Philippine mining index was higher 2.12% (-10.93% y-t-d) this week primarily from gains of gold mines. For the week, Philex Mining bested the field up 10.65%. Apex Mining’s +7.44% came in second, then United Paragon’s +4.62%, Lepanto +3.6% and Manila Mining +2.7%.

With the passage of the BSP’s Gold Bill, the war on gold has ended, which should reduce political uncertainty and risk of the sector. [See Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law! May 26, 2019]

Therefore, a sustained uptrend in gold prices should benefit the underappreciated and highly unpopular industry.  

As Warren Buffett advised, Be fearful when everybody is greedy and greedy when everybody is fearful.

It is time to apply the same formula to the mining sector.

Fear will remain the dominant sentiment over an extended period. As such, returns should outperform as risk diminishes.

In the fullness of time, mines will become a mainstream bubble similar to its previous cycle (2004-2012) which climaxed in 2012.

Let me share a truncated refined excerpt (from my MDR report) for a potential exposure to Apex Mining [PSE: APX]:

APX provides three buying windows which are all dependent on the success of the seed, or the recent breakout.

The first window is at the present levels (1.25 to the early 1.30s), representing an eight-month downtrend.

The second is the three-year (2016) resistance (1.40-1.50).

The third is on the psychological threshold the two-year high of Php 2.

[send a note for more]

Nota Bene: A sustained upside of the international prices of gold ultimately determine the feasibility of the gold trade.

Be greedy when everybody is fearful.