The object of speculation may vary widely from one mania or bubble to the next. At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without a real understanding of the processes involved. Not surprisingly, swindler and catchpenny schemes flourish—Charles Kindleberger
In this issue
Hopium on the US Fed’s Pivot: Philippine Peso Stage a Multi-Year Weekly Rally! The PSEi 30 Extends Dead Cat’s Bounce, But Treasuries Fall (Yields Climb)
I. Drop in US CPI Whets the Nostalgia of Global Asset Bubbles
II. Rampant Speculation Pushes Up Asian Assets on the Hopium of Central Bank Easing (Pivot)!
III. Philippine Peso Stages Multi-year Weekly Rally! The PSEi 30 Extends Dead Cat’s Bounce, But Treasuries Fall (Yields Rose)
Hopium on the US Fed’s Pivot: Philippine Peso Stage a Multi-Year Weekly Rally! The PSEi 30 Extends Dead Cat’s Bounce, But Treasuries Fall (Yields Climb)
Nostalgic over the salad days of credit-financed asset bubbles, a pullback in the US CPI telegraphs the prospective return of easy money policies of central banks. And global financial markets respond in Pavlovian fashion. Asian markets, including the Philippines, join the bidding shindig.
I. Drop in US CPI Whets the Nostalgia of Global Asset Bubbles
From Bloomberg: “Thursday’s shock CPI print was a positive surprise after a week of worry and risk aversion. It set off one of the biggest cross-asset rallies in decades. The Bloomberg US Treasury index has only had three better days this century. Two were during the pandemic volatility of March 2020 and one was March 18, 2009 – the day the Fed announced plans to expand its QE program… The S&P500 and Nasdaq 100 both also had their best day since 2020. The dollar fell by the most since March 18, 2009. Investment-grade bonds, which are even more yield-sensitive than Treasuries, had their best single day in more than 30 years.” (hat tip: Credit Bubble Bulletin)
First, to expect a fallback in the US CPI should not signify a shock since we understand that no trend goes in a straight line. Since peaking in June at 9.1%, October’s CPI of 7.7% marks the fourth consecutive monthly decline.
Besides, some have argued that the technical adjustments in the calculation of the medical CPI may have prompted its recent decline.
Next, the thunderous bid across global asset markets showcases the return of RISK ON climate.
This epic response represents the world's addiction to credit-fueled asset bubbles.
Figure 1
In the US, the hopium on a possible pivot by the Fed dramatically loosened the liquidity constrictions on US Treasury markets, the biggest easing since 2008! (Figure 1, upper window)
This shows that a sustained bounce in the financial markets should indicate a return to credit-easing conditions.
Applying the Philippine example, as previously warned,
To contain inflation, the BSP has raised rates at an unprecedented speed and scale. By raising rates, it targets to curb demand through the 'credit channel,' which means the BSP hopes to drain excess liquidity from the economy.
But instead of hitting its target, a substantial rise in the equity markets extrapolates to an "easing of financial conditions," which may further fuel inflation. It could encourage bank credit flows toward equity speculation that funnels money supply indirectly to the economy.
An easing of financial conditions in the face of tight supply conditions could serve as the next flashpoint for an explosion of inflation, which could compel another round of forceful responses from central banks.
The tightness in supply conditions represents the cumulative repercussions of various dislocations in the international and domestic division of labor. Exemplifying these disruptions are pandemic policies, protectionism or economic and financial warfare various interventions, and the misallocation of capital. For the latter, the diversion of capital emerged as overinvestments or rampant speculations in financials, real estate, and technology.
Its opportunity costs signified years of underinvestment in commodities (agriculture, metals) and traditional energy.
Easing policies from central banks are likely to see a return when the economy contracts sharply or when the risks of a systemic credit event become imminent. In any case, stagflation will likely upend or substitute the public's rearview mirror anchored on disinflation and asset bubbles.
As it is, while the declining CPI may prompt the US Fed to slow their pace of rate increases or even reverse course later (pivot), history has shown that "pivots" have barely been bullish for stocks.
As noted above, central bank rate reductions signify stereotyped responses against a liquidity-constrained stumbling or contracting economy. In the US, historically, bear markets accompanied "pivots." (Figure 1, lower window)
This experience applies to the Philippine setting too. When the BSP started slashing rates in 2019, the PSEi 30 struggled. The panic rate cuts in 2020 coincided with the crash of the PSEi 30.Yes, the BSP pivot worked in 2008. But then, the private and public sector's financial conditions were much healthier. (Figure 2, topmost pane)
II. Rampant Speculation Pushes Up Asian Assets on the Hopium of Central Bank Easing (Pivot)!
Last week's slowdown in the US CPI pulled the US dollar drastically lower and dragged down substantially most of the yields in the US treasury curve.
Inversely, global asset markets (everything bubble) responded with a ferocious rally.
Except for the crypto sphere, haunted by last week's collapse of the FTX exchange, prices of stocks, bonds, and commodities spiked!
Figure 2
The return of the risk ON climate pushed higher Asian currencies, most of the region’s equities, and bonds (lower yields). (Figure 2, second to the highest window)
The South Korean won, Thai baht, and Taiwan dollar were the week's biggest winners, up by 7%, 3.5%, and 3.07%, respectively.
Fifteen of the 19 Asian bourses registered positive returns, which averaged 1.84% for the week. (Figure 2, second to the lowest pane)
The weekly leaders were the equity benchmarks of Taiwan (+7.53%), Hong Kong (+7.21%), and South Korea (+5.74%).
10-year benchmark yields of most Asian sovereigns were down (ADB data as of Thursday), except for Malaysia and the Philippines. (Figure 2, lowest pane)
III. Philippine Peso Stages Multi-year Weekly Rally! The PSEi 30 Extends Dead Cat’s Bounce, But Treasuries Fall (Yields Rose)
Over the week, the USD peso plunged by 2.25%, marking the biggest volatility decline in years! (Figure 3, topmost pane)
Nonetheless, ignoring the easing in global treasury markets, BVAL local currency treasury rates climbed across the curve. (Figure 3, second to the highest window)
Figure 3
At the Philippine Stock Exchange, on a roll for the fourth week, the benchmark PSEi 30 was up 1.64%, pushing the index near the 6,300 level. Since the week of October 14, the headline benchmark racked up 6.05% in returns.
But again, its ascent has been marred by thin volume, mixed breadth, concentrated gains, and poor market internals.
Weekly returns of the four of the top 5 biggest market cap, SMPH, BDO, AC, and ALI, were mainly responsible for the increase in the PSEi 30. Gains in market cap weights likewise reflect these returns.
The lesson is that the opportunity cost of the goal of deliberately pushing up the index through concentrated pumps is the lack of participation in the broader markets.
Figure 4
As evidence, the number of daily traded issues (averaged weekly) fell to May 2020, signifying shrinking turnover diffusing into trade activities of the population of listed firms. Or, lackluster sentiment translates into a diminishing number of issues traded, which affects price discovery.
Volume barely improved too. Though the weekly average main board volume has been up by 37% since the origin of the four-week rally to Php 4.55 billion this week, this increase demonstrates the base effect.
There were only four occasions where volume exceeded Php 5 billion in 18 trading sessions. Or the average volume for this period was only Php 4.38 billion, which includes net foreign buying of a daily average of Php 146.7 million.
Though foreign buying helped, this exposes further the liquidity constraints from the mounting scarcity of domestic savings.
To this point, the benchmark climbed amidst the erosion of market liquidity, indicating the tenuousness of the present activities.
And liquidity or turnover has been dependent on or reflects bank liquidity conditions. The falling trend of the cash-to-deposit ratio of the banking system has resonated with the downtrend of the PSEi 30 volume.
Curiously, several experts expressed optimism that the current winning streak may transform into a bull market.
Good luck with that faith.
But from a chartist perspective, an enormous rounding top continues to torment the PSEi 30. (Figure 4, lowest window)
But more critical than charts, like it or not, rising rates amidst mounting debt loads are crucial risk factors that would weigh on the prices of financial assets.
And present inflationary conditions and the thrust to centralize the economy hardly support an increase in savings necessary for economic investments and placements in the capital markets, which includes equities.
And through the law of demand, rising rates should diminish the number (quantity) of loans demanded.
That said, this rally extends the countercyclical "dead cat's bounce" from the cyclical inflationary/stagflationary bear market.
