Will Financial Tremors in China and Hong Kong Lead to the Big One?

Bankruptcy comes in stages. In the early stages, it is barely visible. Income does not keep pace with expenditures. The spendthrift borrows. "No problem." This is seen as a temporary anomaly. Then the borrowing speeds up, but there is sufficient capital to justify the increased debt. The accountants warn of trouble ahead. The debtor responds: "So far, so good!" "There's more where that came from!" The process continues. Then the accountants say: "The future is now." The spendthrift responds: "Eat, drink, and be merry, for tomorrow we die." —Gary North

In this issue

Will Financial Tremors in China and Hong Kong Lead to the Big One?

-Mounting Stress on China Yuan and the Hong Kong Dollar; Will the Hong Kong’s USD Peg be Broken?

-From Convergence to Divergence: China’s Stocks Leads The Rest of the World Lower as US Tests Record High!

-Will China’s Government Launch Xi Jinping Put 2.0?

-Has Financial and Economic Rescues Reached its Natural Limits?

Will Financial Tremors in China and Hong Kong Lead to the Big One?

From Turkey back to China.

Mounting Stress on China Yuan and the Hong Kong Dollar; Will the Hong Kong’s USD Peg be Broken?

After hitting a 15-month low, the Chinese yuan rallied most since January by .79% last Thursday, on rumors that US-Chineseofficials reopened doors for trade discussions.  In spite of the rally, the USD yuan firmed by .45% this week. (see figure 1, upper pane)

 

Figure 1

Like the yuan, the Hong Kong dollar’s US dollar peg has been under pressure. Hong Kong's de facto central bank, the Hong Kong Monetary Authority (HKMA), reportedly bought more than $2 billion worth of local currency to maintain a long-held peg to the US dollar leaving just $12 billion in its reserves by the end of the week.

Tremors in the yuan appear to have diffused into Hong Kong. Should the USD-HKD peg break, not only will the yuan’s fall accelerate, tensions may intensify in Hong Kong and China’s financial markets that could prick both China and Hong Kong’s property bubbles.

From Convergence to Divergence: China’s Stocks Leads The Rest of the World Lower as US Tests Record High!

 

Figure 2

Strains in the currency markets have been reverberating on China and Hong Kong’s stock markets.

The national benchmark, the Shanghai Composite (SSEC), tumbled by a staggering 4.52% this week, to hit the lowest level of the 2015 crash in January 2016. Hong Kong’s HSI sank 4.07% to a one year low.

From its zenith in January, the SSEC has lost 24.99% and posted a year to date performance of -19.3%, Asia’s worst. Meanwhile, Hong Kong’s HSI which has been down 17.92% from the January peak may likely drop into the bear market’s lair.  

Pressures on the Chinese stock market appear to have truncated the recent rally of ASEAN stocks. Excluding the Vietnamese benchmark, which closed almost unchanged (+.04%), the national indices of Indonesia (-4.83%) and the Philippines (-2.84%) led ASEAN benchmarks down.  

Only six (31.6%) of the nineteen national bourses defied selling pressures in Asia. The region’s weekly performance had an average of -1.35%.

Bank Indonesia raised rates for the fourth time since mid-May this week to stanch the hemorrhaging rupiah (-.79% week on week, -7.66% in 2018). The Philippine peso slid .55% to 53.43.

Since the January acme, the complexion of the performance of global equities experienced a radical change.

While US stocks represented by the S&P 500 (+.59, week, +6.6% year to date) continues to climb to its January highs, the MSCI World ex-US (MSWORLD), China’s Shanghai Composite and the Emerging Market iShares ETF have fallen to reach more than a year’s depths.

Convergence in global equity market performance has morphed into a divergence. Yet how sustainable can this seminal divergence be?

Have global investors been rotating into the US? If world national benchmarks have been signaling an economic downshift, will US stocks follow suit? Or will the US power the global economy higher? But how can the latter be if the trade war will remain in place or if it will intensify?

Such divergent dynamic has also emerged in parts of Asia.

With most of the region’s markets under pressure, the Pacific benchmarks of Australia and New Zealand ironically hit milestone highs.

Bifurcating markets have also appeared in India. While the Indian rupee’s free fall plumbed a fresh low, its equity benchmarks raced to landmark heights!

Will China’s Government Launch Xi Jinping Put 2.0?

The plunge in China’s stock markets should be a concern to Asia. The Middle Kingdom has significant links with latter which functions primarily as its supply chain network. China has likewise been a significant source of Asia’s financing, fund flows, and a market for tourism

In 2015, a slew of draconian measures had been implemented by the Xi administration to arrest the stock market crash.

Aside from imposing assorted bans and limits on equity sales, the government infused cash to brokers and state-owned enterprises to put a floor on the stock market. 197 people, including journalists, were reportedly incarcerated for spreading rumors. “Spreading rumors” carries a three-year jail sentence after its introduction in 2013

The Xi administration’s stock market rescue efforts had been known as the Xi Jinping Put.

Nevertheless, the SSEC still crashed by 48% in 6 months.

The crash exposes how meddling and manipulating the markets will fail to attain its intended objectives. Though perhaps China’s markets could have gone lower, the present stress highlights the fact that kick the can down the road may have reached its end.

China’s stock markets may likely bear the brunt of the accrued imbalances caused by the 2015-2016 Xi Jinping Put.

All actions have consequences.

 

Figure 3

That episode caused the Chinese government to panic!

It launched a considerable amount of fiscal stimulus (see above), accelerate interest rate cuts and infused massive amounts of credit to stabilize and insulate the economy from the aftermath of the stock market crash. According to Federal Bank of New York’s Liberty Street Economics, “In 2016 alone, credit outstanding increased by more than $3 trillion, with the pace of growth still roughly twice that of nominal GDP” (bold and italics mine)

Since the stock market crash, the bank loan share of M2 continues to bulge.

Some of the global central banks responded by implementing negative interest rates in 2016 (e.g. ECB, Bank of Japan, Denmark and Sweden).

Under introduction of the corridor system, the Philippine Bangko Sentral ng Pilipinas slashed rates to a historic low in June 2016(also partly in response to domestic downside price pressures or “disinflation”).  Remember the erstwhile BSP chief Amado Tetangco Jr’s spiel on deflation or disinflation?

If stocks continue to crumble, will the Chinese government respond in the same way as they did in 2015?

Will interest rate cuts be the next move for global central banks?

Has Financial and Economic Rescues Reached its Natural Limits?

But here is the thing.

China’s property markets continue to burn the road.

New home prices and property investment growth have rocketed at the fastest pace in 2 years which had been financed by a rapid buildup in household debt which soared 15.14% in June month on month.

So rescue operations will only accelerate the meltup in the housing market which the Chinese government has been attempting to control, although at local levels.

Figure 4

And weakness in stocks or properties may aggravate its fragile offshore dollar/eurodollar conditions in part by rekindling capital flight and mainly from growing scarcity of access to US liquidity and collateral. China’s international reserves have begun to fall again last July. [upper window]

China’s monetary system, like the Philippines, is built upon mainly forex or international assets (mostly US dollars). [lower window]

China has been experiencing tremendous economic and financial tensions. The snowballing strains appear to be spreading. It has been ventilated on the currency markets (the yuan and Hong Kong dollar) first and then has spread to the stock market. Will credit be next? Then housing?

Unless Chinese authorities will be able to pull a rabbit out of a hat soon, a major financial and economic tremblor may be upon us, with the epicenter in China.

Industrial Sector Firms Barely Joined the Pump to PSEi 7,800-7,900

Like the property sector, the industrials have hardly been participants in the recent vertical price pumps on select issues that propelled the Phisix to its current 7,800-7,900 levels.

Current price dynamic represents an amalgam of the last two attempts (2015 and 2016) at 8,100.

Like 2015, only a few PSEi issues were responsible for the present buoyancy. Like 2016, aside from pumps on elite PSEi 30 issues, there had been selective participation in the broader market.

I constructed three filters to constitute as qualifiers for participant issues in the latest fastest perpendicular thrust on the PSEi 30 since 2007. (Yes current vertical price moves resonate with the August-October 2007)

-current prices for the week have to be higher than the December lows

-current prices for the week have to be at the highest level since the December lows.

-to avoid the consideration of momentary price spikes, which hardly accounts for a trend, an uptrend of at least two months

Here are charts of the 7 industrial composite issues of the PSEi 30…

 

Two main reasons for the exclusion of short-term price spikes: One it hardly constitutes a trend. Second, such steep price actions can swiftly be negated or reversed.

Food manufacturing titan URC’s shocking 11.35% crash (!) this week should serve as an example. The issue could have qualified as a participant in the SM group led PSEi pump, but this week’s crash virtually vanquished all the gains acquired since the end of March. It looks very much like Newton’s Law in action.

Opposite URC, SMC’s Petron (PCOR) rocketed by a staggering 10.89% last week! The surge brought the issue to its highest level since December. It also surged past December lows. But PCOR fails the third criteria: there has been no uptrend except for this week’s spike. And as URC has shown what goes up can come down…rapidly.

EDC could have also been a candidate, but it has failed to break free from its consolidation phase even as the PSEi surged past 7,800.

In all, ZERO, NADA, ZILCH, ZIPPO of the 7 PSEi industrial issues have demonstrated the same degree of frenetic pumping similar to the activities of its peers from the top 5. So unless there will be dramatic and drastic changes soon to reverse this, current dynamics suggest that these issues will WEIGH on any pumping motion directed at the top 10 issues.

To move on to the other 23 of the 29 members of the industrial sector index….

 

Of the 6 issues, only Alson’s Consolidated (ACR) and EEI’s steep climb has resonated with that of the PSEi’s heavyweights.

 

Of the next six issues, only Integrated Microelectronics (IMI) has partaken in the vertical rally. Note that cement manufacturer HLCM plunged due to the disappointing top and bottom line in the 1Q. Think of what this means to the much-ballyhooed infrastructure and construction boom!

 

The third set shows of a much better probability. Three issues Megawide (MWIDE), Purefoods (PF) and Phoenix (PNX) have, so far, been beneficiaries of the recent meltup.

 

And of the last four, the speculative wave has only percolated to Pryce Corporation (PPC)

Additional notes:

Among the significant industrial non-benchmark liquid issues, CIC and ANI have stirred hot whereas CHP and PIZZA have remained cold.

And yes even more intriguing has been the developing divergence in price trends between construction managers EEI and MWIDE vis-à-vis cement manufacturers HLCM and CHP. I will make a short note on the dismal 1Q performance of the cement industry next.

So, only SEVEN issues (ACR, EEI, IMI, MWIDE, PNX, PF and PPC) of the 29 composite members of the industrial sector or 24% have taken part in the recent bidding binge.

Or, such reveals of the very narrow breadth of participation of listed issues under the rubric of the industrial umbrella.

Index manipulators would have to double their time and efforts to pump and heave up the broader markets so as to fulfill their mission of breaking 8,100.

Charts of the Day: Papal Stock Market Cycle (?), US High Yield Credit, Corporate Bond Spreads and Profit Margins

The Papal Stock Market cycle? [Source Business Insider]

Divergences! US stock markets soar as... 

...high yield credit stress surge! [Source David Stockman's Contra Corner]

...corporate bond spreads widen! [source Gavekal Blog]

...and as corporate profit margins tip towards recessionary levels! [source Barclays/Business Insider]

Record Phisix: Why the Bear Markets in 69% of Financial-Banking Index Components?

Despite the recent selloffs, the Phisix still trades at record highs.

But in looking at some of the sectoral broad market performances, record highs haven’t translated into a 'rising tide lifts all boats' phenomenon. To the contrary, record highs appear as an exception rather than the rule.

From the perspective of the Financial and Banking index; some questions:

Why the bear markets in 69% (9 out of 13) of financial sector components???!!!

Why have only four (biggest) banking issues been generating the market’s attention?

Why has it been that only ONE bank has emerged as record holder?

Finally, why the dramatic divergence between top banks and the rest?

The components of the Phisix Financial index (as of May 8, from the PSE):

The 9 banking-financial issues hounded by bear markets! (in pecking order of market cap weighting from the lowest to the highest as of the close of May 8)

Updated to add: Equity owners of the above issues will most likely feel the opposite of what's has been broadcasted at the headlines.

Yet the four outliers: the sole record holder and 3 contenders for record highs

Yet such disparity hardly seems to be about earnings (LTM September 2007-2014).

Considering that the three biggest banks constitute significant weightings on the Phisix benchmark, could such flagrant divergence have been a result of the actions of index managers to push these issues—as part of the grand scheme—to pump the Phisix to record highs?

Could it be that in order to likewise embellish the Financial Index, the fourth biggest bank also served as contingent to the syndicated pump?

Finally, even outside the context of market manipulation, the growing concentration of trading activities, as well as, the deepening divergence between top issues with the broader market, doesn't seem to as an indicator of a healthy bullmarket, but one of "distribution" or a "topping" process.