The Philippine PSEi 30’s Weekly Spike of 2.88%: an Oversold, Dead Cat’s Bounce?

 Never follow the crowd―Bernard Baruch 

The Philippine PSEi 30’s Weekly Spike of 2.88%: a Dead Cat’s Bounce

 

The consensus will attribute the GDP, inflation, and several earnings beats to the PSEi 30 weekly 2.88% spike.  In contrast, circumstantial evidence reveals that it was an organized and concentrated effort. 

 

I. PSEi 30 Outperformed Asia-Pacific 

 

Up 2.88% over the week, the principal benchmark of the Philippine equity, the PSEi 30, upstaged its regional peers.  Only Pakistan's Karachi 100’s 4.18% topped the PSEi.  

Figure 1 

 

Nonetheless, Asia-Pacific remains on a risk ON mood, with 15 of 19 national bourses closing higher, averaging a return of .8%.  South Asian benchmarks posted most of this week's gains, while ASEAN indices came second. (Figure 1) 

 

As previously noted, expectations of the Fed's "terminal rates" have fueled a frenzy in bidding up capital market assets.  Idiosyncratic factors in the domestic economy have been responsible for the asymmetric dispersion of gains. 

 

II. Risk ON: The Philippine Peso and Treasuries Rallied 

 

Nevertheless, it is necessary to analyze the market internals to discover if this week's "boom" has "legs." 

 

The Philippine peso rallied by .25%.  The USDPHP closed below 56 at 55.96 last Friday—a level last seen in August 2023.  The rallying peso dampens inflation expectations.   

Figure 2 

It was a mixed week for Philippine treasuries, with yields rising on BVAL T-bills and plunging on the notes (2-10) years.  Long-term yields also slipped. (Figure 2, upper window) 

 

These developments have led to a bull flattener—long-term rates falling faster than the short ones (compared to end-October).  It means the local treasury markets have partially shifted their concern from inflation to the coming rate cuts or "pause."  (Figure 2, lower graph) 

 

A bull flattener could help the stock market in the short run.  But declining rates and/or central bank rate cuts are usually in response to a substantially slowing economy or a recessionary environment.  And such an environment wouldn't be favorable to the stock market.  

 

III. PSEi 30: 64% of this Week’s Gains from End-Session Pumps; Economic Implications 

 

Beyond the headlines, one can interpret this week's outperformance by the PSEi 30 as an outcome of non-market forces.  Or, gains by the local benchmark had been forced and artificial.  

 

Figure 3 

This week's pre-closing pumps totaled about 110.39 points or 64% of the week's advance of 172.62 points or 2.88%.  Stunning. (Figure 3, upper graph) 

 

Since the stock market represents titles to capital, price pumps or dumps spur distortions or mispricing that send false signals to the economy.    

 

As such, the extended period of distortions results in the accumulation of misallocation of resources or a maladjusted (bubble) economy. 

 

It is also a bad sign for governance because it shows the biases of authorities in protecting vested interest groups rather than preserving the integrity of a market institution.   

 

Such developments also expose the inherent weakness of extant regulations, subjecting watchdogs to "regulatory capture," which means that if certain groups can "game" the market, why wouldn't they apply the same to their firms?   Doesn't this also reflect the surfacing of corporate aberrations, such as how and why one of the biggest telco firms, after it declared a 4-year "overbudget," got away clean?  

 

It also showcases the inflationary psychology expressed as the public's increasing high-time preference (or short-term orientation) of permitting these anomalous transactions—metastasizing these into a market norm. 

 

Yet, the growing popularity of top-down/centralization workaround of the financial economy erodes productivity and savings.  

 

So, the elites work on camouflaging these by inflating economic and financial statistics, "gaming" the financial markets, and imposing controls on "real" market prices (e.g., SRPs or price caps)—which at the day's end transforms into anti-competition moat.  

 

IV. More Circumstantial Evidence of Concentration and Organized Pumps: Volume of Top Brokers and Top Traded Issues 

 

In any case, this week's surge was, ironically, accompanied by volume stagnation.  The average daily mainboard volume (MBV) tanked by 14.33% to Php 3.075 billion--below the 2017 lows! (Figure 3, lowest chart)  

Figure 4 

 

An average of 61.3% of the daily MBV were from the top 10 brokers, where cross-trades from these accounted for about 12% (my estimates).  The decreasing volume has prompted a rise in the share of the top 10 brokers. (Figure 4, topmost chart) 

 

The top 3 largest market cap (Sy group of companies) accounted for an average of 29.9% of the MBV. The share of the three companies has been on a slo-mo uptrend since 2021. (Figure 4, middle window) 

 

The top 20 most actively traded issues represented had an average of 82.9% of the MBV.  It has the same uptrend dynamics as the top 3.  

 

Again, the slowing volume has resulted in the rise of trades in the elite group (mainly from the top 10 market cap issues). 

 

In the face of diminishing volume, the growing share of the elite brokers and top traded issues highlight the mounting concentration of transactional activities.   

 

V. Dead Cat’s Bounce: Divergent Advance-Decline Spread, Skewed Distribution of Market Cap Weights and Counteracting Role of Foreign Money 

 

Further, despite the headline spike, the advance-decline spread of the PSE was (believe it or not) a NEGATIVE 23 (416 advancers, 439 decliners, and 241 unchanged)!   

 

This data tells us that there was little diffusion into the broader market. (With that volume, why would it?) The data also suggest that retail was largely absent in the runup.  

Figure 5 

Members of the PSEi 30 benefited from last week's pump, with 22 of the 30 issues up.   But again, the top 10 market cap issues had the most gains this week.  (Figure 5, upper graph) 

 

Because of these, the skewed dissemination of gains only widened the differentials between the PSEi 30s largest market caps and the benchwarmers.   

 

As of November 10, the top 5 free float market cap issues command an incredible 47.2%, while the biggest 10 group holds 69.6% of the PSEi 30's free float weight distribution.  The PSEi 30s market cap share distribution mimics the "Power Law." (Figure 5, lowest chart) 

 

End-session pumps only highlight such organized and concentrated trades by the local version of China's "national team."  As a caveat, China's NT intervenes within the intraday session and barely at the closing bell.   

Figure 6 

 

Foreign money has typically counteracted these organized and coordinated pumps. (Figure 6, upper graph) 

 

But this week's net Php 86.9 million inflows suggest that foreign funds became their ephemeral ally.  

 

Unlike in the past, foreign flows represented non-resident funds.  In contemporary times, flows from resident-owned companies domiciled abroad or through some of their international partnerships could be categorized as "foreign."    

 

There you have it; last week's stock bidding ramp, backed by circumstantial evidence of concentrated and organized pumps in the face of decaying volume, barely brings about sustainable bullish signs. 

 

Seasonal factors may help, but unless there will be improvements in savings extrapolated into volume or market liquidity, this week's spike represents an oversold, dead cat's bounce.  (Figure 6, lowest graph) 

"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