BSP QE 2.0 Variant Spurs Huge PSEi 30 Rally; Falling US Dollar Reflates the Everything Bubble

 Most investing mistakes come from a desire to sound smart and use over-complicated metrics. Most investing legends have always broken it down into very basic calculus and an ability to abstract the noise and strip the complexity down to verifiable quantums—Carlo Casio  

In this issue 

BSP QE 2.0 Variant Spurs Huge PSEi 30 Rally; Falling USD Reflates Everything Bubble 

I. The Link Between Bank Liquidity and PSE Peso Volume and PSEi 30 Returns 

II. The Impact of the BSP QE Variant to the PSE and PSEi 30 

III. Bull Trap: Sharp Rallies Are Natural Occurrences of An Inflationary Bear Market 

IV. Easing Global Financial Conditions: Short Covering Powers Financial Asset Boom 

 

BSP QE 2.0 Variant Spurs Huge PSEi 30 Rally; Falling USD Reflates Everything Bubble 

 

The BSP's stealth QE 2.0 variant has flooded liquidity into the asset markets sending stocks and fixed-income securities higher.  However, while inflationary bear market rallies tend to be sharp, it represents "bull traps." " 

 

I. The Link Between Bank Liquidity and PSE Peso Volume and PSEi 30 Returns 

 

This post is a sequel to "The BSP Unveils Stealth QE 2.0 (Variant)!" 

 

Let us start this terse analysis with the following premises: the correlation and causation of the bank liquidity, the PSE turnover, and the annual returns of PSEi 30. 

Figure 1  

The correlation: since 2013, the bank's principal liquidity metric, the downside gyrations of the cash-to-deposit ratio, has coincided with the fluctuating declines of both PSE peso volume % YoY change and the PSEi 30's annual return. (Figure 1: top and middle charts) 

 

The causation: As principal financial intermediaries, the banking institution help channels savings or disposable income into the capital markets.  It also helps intermediate credit to capital markets.  That said, the decline in savings growth affects bank liquidity conditions, with second-order effects on the currency or the peso turnover of the stock market (bond market too).   

 

Consequently, these percolate into the returns of the investments (in the PSEi 30, the PSE, and fixed-income securities).  

 

And given the limitations of the structure of the marketplace, represented by low participation rates characterized by relatively low volumes compared with its regional peers, the financial industry, led by banks, plays a critical influence in shaping returns.  Only about 1% of the population has direct exposure to the stock market. 

 

It is not a surprise that the oscillations of bank credit to the financial industry have also resonated with the fluctuations of the nominal PSEi 30 index. Perhaps, a segment of its flows could have represented intra-industry margin credit. (Figure 1, lowest window) 

 

II. The Impact of the BSP QE Variant on the PSE and PSEi 30 

 

This perspective should help us understand the likely influence of the BSP's QE 2.0 variant, which likely involves reducing either government or bank deposits from its portfolio.  It could also be about the redemption by the BSP of its bills payable.  

 

At first glance, it means depositors gaining access to the money stashed at the BSP or creditors paid by the latter.  

 

It is no surprise then that such excess funds may have found their way to the stock market, which could also represent the grand design for this policy shift—to push back against the risk of credit deflation by fueling higher prices of financial assets to keep collateral values elevated. 

 

And because financial institutions are likely the beneficiaries, these funds could have also been used to bid up domestic capital markets to improve asset values necessary for their balance sheet valuations.  

 

Hence, for this week and for the two weeks of the year, the bank stocks of the headline index have powered the PSEi 30.  

 

Figure 2 

 

Although all sectoral indices were higher in the last two weeks, the financial index outsprinted its peers to soar by 8.89% in the first two weeks of 2023. The PSEi was up 4.25% this week and 5.87% in 2023. (Figure 2, topmost window) 

 

As a % share of the free float market cap, the three top banks have consistently been climbing since the BSP's historic rescue in 2020. (Figure 2, middle pane) 

 

Unfortunately, based on returns, the non-PSEi 30 banks have barely kept pace with them, which shows the difference between market cap heavyweight and non-PSEi members. 

 

Yet, the present gains must have emanated from the torrent of liquidity flows from the QE 2.0 variant. (Figure 2, lowest window) 

Figure 3 

Of course, the inflationary conditions signify the critical difference in the launch of QE 2020 and its variant today.  

 

Despite the rationalizations of the "return of the bull market" from "peak inflation," the masqueraded liquidity infusions are likely to fuel the next wave of street inflation. In 2015-2018, the PSEi 30 surfed the rising tide of the CPI.  Such correlation stopped after. (Figure 3, upper chart) 

 

Money supply, which has diverged with bank credit, will likely pick up the tempo from its recent downshift, anchored by credit-financed public spending.   

 

In the first phase, or when the BSP unleashed QE 1.0, it sharply accelerated the upside trend of M2 in 2020 that climaxed in May 2020; but that didn't last.  M2 roundtripped in just over a year.  M2 grew by 6.3% in November to confirm its long-term downtrend. (Figure 3, lower chart) 

 

All these reveal the changing phase of the impact of liquidity on asset and street prices. 

 

III. Bull Trap: Sharp Rallies Are Natural Occurrences of An Inflationary Bear Market 

Despite the emphatic assertion by some quarters, the sustainability of the so-called "return of the bull market" is highly doubtful.   

 

Aside from the escalating leverage in the PSEi 30, the PSE, and the banking system, volatile and elevated inflation and interest rates are likely to keep any meaningful advance at bay.   

 

Of course, institutional pumps can always bloat the gains.  But artificial maneuvers will eventually succumb to economic reality. 

 

Public debt should continue to ascend as the popular perception of economic development requires high rates of (credit and inflation-financed) deficit spending. 

 

Increasing centralization also represents a structural political path baneful to sound economic growth.  

 

And there are yet exogenous factors that serve as critical obstacles to the international division of labor and access to capital, labor, and investments, as well as substantial volatility and distortions in the prices of global financial assets, commodities, and services.

The recent sharp rally evinces signs of relative weakness.  

 

Figure 4 

Its backdrop lacks vital structural support: relatively weak in volume (main board) and market internals represented by daily trades and daily traded issues compared to when the PSEi 30 reached the same levels powered by QE 1.0 in 2020-2021. (Figure 4) 

 

Needless to say, sharp rallies are natural occurrences of an inflationary bear market.  

 

Put differently, big rallies in an inflationary environment are likely a "bull trap." 

 

IV. Easing Global Financial Conditions: Short Covering Powers Financial Asset Boom 

 

Figure 5 

Finally, reviewing the impact of BSP's QE variant on financial assets represents only one of the many aspects of the recent easing of global financial conditions. (Figure 5, highest chart) 

 

The drastic fall of the USD has spurred massive short-covering worldwide, fueling a rally in almost everything from cryptos to fixed-income securities to meme stocks to commodities and others.   

 

For instance, global credit markets posted their largest inflows (since June 2021) while the rebound in USD-priced industrial metals (GYX) has accelerated. (Figure 5, middle and lowest panes) 

 

But of course, all these have been anchored on expectations of the return of the cheap money regime.  

 

Yet, magnified volatility translates to select trading opportunities.  

 

Be careful out there.  

Phisix Operation Team Viagra Log April 20, Sharp Losses of China’s Shanghai Index Possibly Eased by National Team Interventions

Well, there has been no let up when it comes to cosmetically sprucing up the Philippine headline index.

While today’s intraday price actions had mostly been less volatile, “marking the close” pump contributed to the erasure of a staggering 42% of the day’s loss which tallied at -.19%.(see below)

As been noted yesterday, the apparent task by the index has been to keep PSEi from falling below 7,200.

However, instead of bolstering the index via the broader market, they opted to play safe today.

So the use of two major issues from two key sectors. 

SMPH’s share price magically jumped by a stunning 1.6% at the last minute market intervention phase to close the day up by 1.82%. This means that a whopping 88% of SMPH’s gains had been due from "marking the close". So SMPH pushed the property index and the PSEi higher.

On the other hand, AC was down by a big 1.7% just right before the close. However, index managers pushed the said stock by .9% to reduce the day’s decline to just .8%! Or close to half of AC's deficit was expunged courtesy of the index manipulators. So AC contributed to the push in both the headline and the (holding) sector index

Almost daily price fixing of the index and the PSE: only in the Philippines!

Oh by the way, Chinese stocks tanked by 2.31% today. But the day’s loss had been mitigated by what I would suspect as interventions from the "national team".

Unlike the Philippines, at least the Chinese government admits to these interventions.

The Shanghai index dived by as much as 4.4%, post lunch, before its sudden surge to wipe out 47.5% of said deficit at the near close. The Google chart above accounted for the last five day intraday sessions of the Shanghai index. And the huge pump can be seen in the rightmost side of the chart.

As one would note, pumping occurs at almost each session close (see red boxes). 

The difference is that the Philippines version signifies a Viagra like response as price fixing occurs at the last minute or during the transition from regular market trading to market intervention phase, hence the "marking the close", this compares to the last quarter of each session push as seen in the Chinese version. The Chinese national team ought to import Philippine price fixers.

The role of the Chinese national team as indicated in today’s Bloomberg report: Signs of stabilization in the world’s second-largest economy and speculation of buying by state-backed funds helped send the Shanghai Composite up 12 percent since its low on Jan. 28. China reported the economy grew 6.7 percent in the first quarter, in line with estimates, while industrial output and retail sales in March beat expectations. China stepped up intervention in its financial markets after stocks extended last year’s $5 trillion selloff and the yuan fell to a five-year low.

Moreover, China’s central bank the PBoC via its agency State Administration of Foreign Exchange (SAFE) have been indirectly amassing stocks.

From the Nikkei Asia

Consider Wutongshu Investment Platform, which is wholly owned by the State Administration of Foreign Exchange. Since last year, the fund has acquired at least 30 billion yuan ($4.62 billion) worth of shares.

Wutongshu was established in November 2014, with 100 million yuan in capital. It is reportedly led by He Jianxiong, a former director-general of the international department at the People's Bank of China. Recently, the fund's name has cropped up on the rosters of major shareholders of at least 12 listed companies.

As of Friday, its holdings in Shanghai Pudong Development Bank were valued at around 11 billion yuan, while those in Industrial and Commercial Bank of China (ICBC) were worth about 6 billion yuan. The institutional investor also runs a pair of investment companies. It appears the strategy is to have the parent increase its weighting of bank stocks, while the two units are likely focusing on other industries.

It wasn’t stated whether SAFE’s Wutongshu Investment Platform directly intervened or intervened through intermediaries from which the company provided financing. So the Xi Jinping Put has been extended to use the PBoC's SAFE.

As for today’s weakness in Chinese stocks, the same Bloomberg report seem lost to explain today’s actions

Traders struggled to explain the reason behind the sudden selloff, which isn’t an unusual occurrence in a market dominated by individual investors. Interest in mainland equities has been fading this month after March’s 12 percent surge amid concern that improving economic data will prevent the government from adding stimulus. Wei Wei, an analyst at Huaxi Securities Co. in Shanghai, says the slump is triggering concern that the panic seen at the start of the year, when the equity gauge sank 23 percent in the space of a month, could return.

Perhaps the lifting of the ban last April 8 on large shareholder selling of more than 1% of the stake may have been a factor. The easing of selling restrictions allows large shareholders to sell up to 1% of the total in a three month period, according to the Nikkei Asia

The other factor could be from reports that China’s $ 3 trillion corporate bond may have started to unravel

From another Bloomberg report yesterday

Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have canceled 61.9 billion yuan ($9.6 billion) of bond sales in April alone, and Standard & Poor’s is cutting its assessment of Chinese firms at a pace unseen since 2003.

While bond yields in China are still well below historical averages, a sustained increase in borrowing costs could threaten an economy that’s more reliant on cheap credit than ever before. The numbers suggest more pain ahead: Listed firms’ ability to service their debt has dropped to the lowest since at least 1992, while analysts are cutting profit forecasts for Shanghai Composite Index companies by the most since the global financial crisis…

China’s leaders face a difficult balancing act. On one hand, allowing troubled companies to default forces money managers to pay more attention to credit risk and accelerates government efforts to curb overcapacity. The danger, though, is that investor panic leads to tighter credit conditions, dealing a blow to President Xi Jinping’s plan to keep the economy growing by at least 6.5 percent over the next five years.

Economic figures for March reveal a growing dependence on debt. China’s aggregate financing -- a broad measure of credit that includes corporate bonds -- almost doubled from a year earlier to 2.34 trillion yuan, exceeding all 24 forecasts in a Bloomberg survey as policy makers turned on the taps to support economic growth.

If the latter (emergent signs of corporate bond strains) will be or serve as the cause that may be aggravated by the former (1% selling rule), will the Chinese national team be able to stop the tidal wave of selling?

And to extend the thought, will the local or Philippine counterpart be able to forestall a potential chain effect from the above?

Interesting

Note: Philippine data/images from Bloomberg, technistock, colfinancial, and the PSE