"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  

 

USD Peso Stages Breakaway Run! Correction Due; Global Liquidity Conditions, Like Deutsche Bank and Euro Money Market’s Dilemma will Play a Role

The Philippine peso was clobbered this week by 1.06% for the fifth consecutive week of losses. The USD phpclosed at 48.50 for the week.

The peso presently owns the tiara as Asia’s worst performing currency on a week on week (top) basis, as well as, year to date basis.

Malaysia’s ringgit has been the second runner-up for the week, while the peso has supplanted the Chinese yuan as tailender on a year to date basis.

 

In my view, the sharp vertical uptick of the USD php has now reached severely overbought levels and could be bound for material contraction or Newton’s law.

But since the currency markets have the tendency to be more volatile, thus Newton’s law may not be as effective as they apply to stocks. But they still apply.

History shows the way.

Over the past three years or since 2013, the USD php has spiked FOUR times.

The biggest vertical move occurred during the taper tantrum where the USD peso soared 7.4% in one monthand two weeks. Newton’s law has not appeared here.

The second leg of the USD php run had another 5.5% vertical run (on top of the 7.4%). It was here where Newton’s law emerged to erase all the gains of the second leg

But the gains from the first leg had virtually been unscathed or untouched.

Newton’s law only took the froth off the second leg but maintained the gains of the first leg which served as a staging point for the third leg.

The third leg was during the 3Q of 2015 where the USD php surged by 4%. Newton’s law reemerged but didn’t take back all of the gains.

That’s because the USD php crawled back to hit a high of 47.995 last January 26 in harmony with the downturn in global markets.

When global central banks went on a full-scale rescue of the stock market via the Shanghai accord where negative rates were implemented, this coincided with the BSP’s unleashing of the stimulus, so along with local stocks, the peso rallied.

But unlike stocks which rebounded furiously, the peso’s ascent had virtually been capped.

As I have noted here, the inverse correlation between the peso and stocks seem to have been broken. It’s only recently where the correlation seems to have been resurrected.

Present events signify as the fourth leg of the USD php upside trend. As of Friday’s close at Php 48.5, this serves as a BREAKAWAY run from the January 26 high.

Such breakaway run makes the USD php at 50 (November 2008 high) a visible horizon.

That’s most likely a target AFTER the USD corrects or sloughs off some of its overbought conditions.

Interestingly, from the close of 2012, the USD php has delivered 18.1% in returns, over the same period the Phisix generated 31.2%.

So the Phisix massively outclassed the USD php. But if I am right those fortunes will soon reverse.

Prices of exchange rates are fundamentally a product of demand and supply.

The surge in USD php has presently been from greater demand for the USD than the peso.

As I have previously observed, this may be a knee-jerk reaction, there may be a real run on the peso, and finally, the peso has been used as a political weapon by geopolitical forces.

Yet this has been happening ironically in the face of reported record GIRs

The BSP also reported its August banking system’s loan conditions as well as the liquidity conditions last week. While the bank loan growth remains substantially elevated (at 4Q 2014 levels), fascinatingly, money supply M3 has sharply decelerated to 11.8% from 13.1%.

It is as if lots of bank borrowers have stopped spending. So the funds that they have borrowed may have been used to hoard cash, pay down debt or buy USD.

And a sustained fall in M3 will likely translate to a downside trajectory for NGDP and nominal sales.

Yet even at 11.8% money supply growth remains a rapid clip. This shows the longer term supply influence of the peso to the exchange rate

 

Another curiosity, growth of government’s external debt plunged to 2.68% last August from the 6-8% range it registered during the past 9 months. Has the government raised sufficient taxes, as well as USD dollars last August enough to cover its deficits last July?

Or has the present improvement been part of the PR campaign to embellish statistics to bolster the peso and the economy’s conditions?

Lastly, not everything will be about the domestic conditions. Global factors will increasingly come into the picture.

The unfolding banking crisis in Europe will also play a big role.

So as with the surging LIBOR and TED spreads in the US (largely blamed to 2a7 reforms), the untamed China’s interbank rate Shibor, and the still ongoing problems Japan’s banking system, as well as, Saudi Arabia’s liquidity problems

It took rumors that Deutsche Bank reached a settlement with the US justice department worth $5.4 billion in fines which have been  far lower than the original $14 billion to stem the collapse in share prices last week.

Because of the massive short positions on Deutsche Bank’s shares, the rumor impelled for an intense short covering which lifted global stocks on Friday. DB soared 14.02% last Friday where the market cap was last at $17.7 billion (yahoo Finance).

And because of a holiday in Germany in Monday, regulators have become so sensitive to any potential liquidity squeezes for them to float temporary responses.

Like Wells Fargo, several employees at the Deutsche Bank have also been charged by the Italian government for creating false accounts. So aside from financial woes, impropriety will partly play a role in the coming sessions.

Rumors have been floated that DB will be rescued, but German’s media says that the German governmentwon’t do this. A bailout by the German government would set a precedent for Italian government to bailout its besieged banks, which the German government has stridently opposed. In my view, further stress in the market will force their hands. But whether the bailouts or bailins will be successful is another matter.

And anent the lingering bank and financial concerns, it’s not just DB, Germany’s second-largest bank Commerzbank announced that it would cut dividends and slash 9,600 jobs. Netherland’s largest lender, theING will also announce job cuts this week. So even banks in creditor nations of Europe are being affected.

Incidentally, USD liquidity conditions have been stretched out at the money markets in Europe such that the cost to borrow USD via cross currency swaps has risen to 2012 levels. And it’s not just in Europe, hedging cost for the USD yen also via cross currency swaps have experienced a “blowout”. These are signs of USD shortages.

The ongoing liquidity shortages have become apparent such that the Saudi Arabian government had to inject $5.3 billion into the banking system to tame surging interest rates and contain stress in her currency, the riyal. 

As the chart from the Alhambra Partners shows, the surge in US TED spread has mirrored (inverse) DB’s share prices (along with many other price signals including treasury fails) way back to 2014.

As the prolific analyst and research manager Jeffrey Snider wrote:

While attention is rightly focused on Deutsche Bank it is only so because the bank is the most visible symptom being the most vulnerable participant in this “something.” DB is just an outbreak so prominent that the mainstream can no longer pretend there is nothing worth reporting – but they can still obscure why that might be, focusing on the canard about the DOJ settlement. This is a systemic issue, one that is as plain as Deutsche’s stock price.

Liquidity risk is indicated pretty much everywhere, a direct assault not just on mainstream conventions about monetary policy but monetary competency itself.

Use any weakness in the USD to accumulate.