Asian Risk OFF Day: Japan's Nikkei Dives 4.2%, Singapore’s STI Breaks Support, Yields of Indonesian Bonds Soar

What an astounding risk OFF day. 

The 2+% plunge in US stocks last night hit some Asian markets right smack on the chin.

Japan’s Nikkei 225 plummeted a whopping 4.2% today!

The Nikkei 225’s ongoing meltdown (top  window) which ironically commenced during the New Year, has been tightly correlated with the sharply rallying Japanese Yen vis-à-vis the US dollar.

And it has not just been the Nikkei, Hong Kong’s Hang Seng Index likewise got drubbed by 2.89%. 

Given that China’s financial markets remain closed due to the week long New Year festivities, has the Hang Seng’s decline been an indicator to the sentiment of the Chinese financial markets once they open? 

The Philippine Phisix also tumbled by 2.15% on heavy foreign selling (technistock.net)

Singapore’s stock market benchmark’s decline, as measured by the Strait Times Index (STI), hasn’t been as deep as those above… 

...but today’s action highlights the confirmation of yesterday’s breakdown from key support levels (see above). 

Although the STI is still about 5.9% away from a technical bear market.

And in addition, the weakening STI goes along with a sluggish Singapore Dollar which seems also nearing a breakdown from support levels. 

Singapore’s bond markets seem also in distress. Yields of 10 year Singapore SGD denominated treasuries while down by about 12 bps from the recent highs has still been about 100 bps from the 2013 lows.

Could it be that the strains in Singapore’s financial markets have been  symptoms of her significant exposure on ASEAN economies, with emphasize on Indonesia, as previously discussed?

And speaking of Risk off and Indonesia, yields of the latter’s 10 year rupiah bonds soared today; currently priced at 9.13% (as of this writing) which backed off from a high of 9.27%. Nonetheless current yield stands at the 2011 levels.

Although the Indonesia’s equity bellwether the JCI which is still trading as of this writing has been down by less than 1%.

All this brings us back to the issue of foreign currency exchange reserves.

The mainstream assures us with confidence that forex reserves should shield markets or economies from such events.

Yet none of this panacea appears to be working. That’s because there seems hardly any correlation between stock market/economy and forex reserves.

Just look, Japan has $1.25 trillion in forex reserves. The Japanese government continued to amass forex reserves through her own bubble bust in 1990, the 1997 Asian crisis and the 2007-8 Global Crisis. 

As a side note: Japan’s reserve accumulation may have peaked given the recent record streak of balance of trade deficits as well as record budget deficits.

Meanwhile, despite the current financial tremors, Singapore’s government continues to pileup on Forex reserves which is now at almost $350 billion (about 3x the Philippines). 

Yet with all these accumulation, Singapore has not been immune from the Asian Crisis, US dot.com bust or from 2008 Global Crisis in terms of…

the stock market via the STI… where the STI fell dramatically into bear markets during the above stated episodes

...and or even as exhibited in the statistical economy which reveals of recessions during the above events.

Meanwhile Hong Kong has $311 billion of forex reserves.

And by the way, Indonesia’s government had record forex exchange reserves during the 2008 global crisis and continued to accumulate until the peak in 2011

In spite of all the evidences, the Panglossian consensus continue to holler in unison “forex reserves!”, “forex reserves!”, “forex reserves!”

Has this rabid denial been because "a pleasant illusion is better than a harsh reality?" (quote from Christian Nevell Bovee)

ASEAN Meltdown: Indonesia’s JCI in Bear Market, Thailand’s SET and Malaysia’s KLSE Clobbered

When I wrote, “And if rising UST yields have indeed been reflecting on growing scarcity of the quantity of US dollar relative to her non-reserve currency trading partners such as ASEAN, then higher yields would likewise imply pressure on the currencies, and similarly but not contemporaneous, on prices of financial assets…”, I meant that the impact from rising bond yields or interest rates will not be the same for each markets, in terms of timing and scale. This also means that the turbulence emanating from the raging bond vigilantes will intensify and spread.

Such dynamic seem to hit not only ASEAN, but the rest of Asia. The region’s markets had mostly been in red today. 

With today’s 3.21% rout, the Indonesia’s JCI has technically entered the bear market (20% threshold) territory.  Among the ASEAN 4, the JCI follows the Philippine Phisix as having touched the bear market zone. The Philippines reached the bear market last June but has bounced back.

And what seems as difference between JCI and the Phisix is that in the Philippines there has been a massive denial by the public of the existence of the bear market out of the devotion to "this time is different" mantra. 

Meanwhile, the JCI fell by as much as 5.5% intraday before bouncing back.

Despite the JCI’s substantial intraday recovery from the troughs, the Indonesian currency the rupiah (USD IDR) slumped and closed at the lowest level of the day.

Mainstream media attempts to shift the blame on Indonesia’s plight to the surging current account deficits. The reality is that such deficits are only symptoms of Indonesia’s systemic bubbles which appears to be imploding, aggravated by the bond vigilantes.

Thailand’s SET also closed sharply lower, but not as much as yesterday’s 3.27% dive.

Like the JCI, the SET gradually chipped off the early losses which peaked at about 3% intraday.

Thailand reportedly has fallen into a recession during the second quarter.

The currency the baht (USD BHT) also closed lower today

Malaysia’s KLCI which seemed as the most resilient among the four ASEAN giants, appears to have finally been affected by the contagion. The KLCI suffered substantial 1.85% loss today.

Malaysia's currency the ringgit (USD-MYR) has initially been sold off but recovered by the late session to close the day marginally lower.

Meanwhile I read a belated news report where the influential association (cartel??) of financial institutions, the Institute of International Finance (IIF) expects the Philippine central bank to tighten soon in order to “keep” the economy from “overheating”. Overheating is a euphemism for credit bubble.

The report quoted a BSP official warning that “a protracted period of high M3 growth may pose risks to the Philippine economy if it leads to higher inflation.”

First this looks like part of the signaling channel used by central banks to condition the market’s expectations.

Next, the BSP, on its own, will not tighten. Instead the market has already been tightening. Bank loans have been slowing down from the start of the year, which extrapolates to a peaking of M3, as I previously pointed out. The diminishing pace of bank lending will reflect on the future data of monetary growth conditions that will also be reflected as slower statistical economic growth. The BSP thus will react to the market rather than influence them

Such slowdown has already been manifested by the Philippine financial markets. And rising US bond yields has only been exacerbating these conditions. 

The Philippine peso (USD-Php) was significantly lower in the global spot currency markets, despite today’s extended flood and weather related suspension of school and offices.

It would be interesting to see how the Phisix will react  during the resumption of trade this Thursday, especially if ASEAN and global markets continue to bleed. Will the Philippines be lucky enough to escape the two day carnage?

Although perhaps given the oversold conditions of the equity markets of Indonesia and Thailand, a relief rally could be expected tomorrow or soon, possibly underpinned by a sharp rally in 10 year US Treasury notes (or steep fall in yields) as of this writing.

Meanwhile except for Indonesia, ASEAN bonds has been minimally affected by the current rout thus far. But it would naïve to believe that such conditions will remain. In the Philippines, media and BSP officials has already been insinuating or implicitly conditioning the public of a prospective “tightening”. This means bonds are the next line in the bond vigilante instigated temblor.

Caveat emptor.

Black Swan Moment: Nuclear Safety Concerns Hammer Asian Stocks

There is an ongoing meltdown in Asian stock markets spearheaded by Japan, as of this writing.

charts from Bloomberg

Before I get “I told you so” quips from perma bears, the reason this has been happening, according to media, has been principally about nuclear safety issues and hardly about debt or other mainstream issues.

According to the Los Angeles Times,

Panic selling looked like it was spreading across Asian financial markets on Tuesday after Japan warned of rising meltdown risk at the crippled Fukushima nuclear reactor complex.

The Japanese stock market’s Nikkei-225 share index was down a stunning 1,275 points, or 13.3%, to 8,344 at about 9 p.m. PDT, with about two hours to go in the trading session.

Of course, because of the state of panic, many other chain effects such as the impact on fiscal conditions or credit (default risk) concerns or economic growth will also be attributed. It's people instinct to add causal linkages, even if they are irrelevant, mostly for social signaling purposes (intellectual strawmen).

Let me add that perhaps fears of contagion from radiation leaks may have also affected Japan's closest neighbors which may have also prompted for a domino effect dynamic throughout the region.

So yes while we may be seeing a blackswan moment (low probability, high impact event) triggered by nuclear safety issues (which apparently no one has seen or predicted), for me this looks more like a knee jerk reaction rather than a strong case for structural reversal.

Here’s my guess, after Japan has expanded their engagement on their version of a Quantitative Easing (QE), expect the US to shift rhetoric from the farcical “exit” strategies to QE 3.

Japan’s disaster has just given the US Federal Reserve a crucial excuse or justification to undertake extensions of their money printing operations or ‘credit easing’ policies.

While I am not sure about the ECB or BoE, I am inclined to think that they might join the bandwagon too.

Successful Bond Raising Dispels The Greek Debt Crisis Myth

Greece successfully raised funding on the debt markets on an oversubscribed basis.

This from the Timesonline,

``Concerns over a possible debt crisis in Greece eased yesterday after huge demand for the Greek Government’s first bond issue of this year.

``Greece had planned to sell €5 billion (£4.4 billion) of new five-year bonds to investors, but, after about €25 billion of demand emerged, it decided to issue €8 billion.

``The auction had been seen as a key test of investors’ appetite for Greek government debt and was heralded as a triumph by the authorities in Athens. “There was a lot of interest,” Spyros Papanikolaou, head of Greece’s public debt management agency, said. “This proves the trust [that] investors have in Greece’s economy. Greece [has] proved [that] it can raise the funds it needs for 2010 without a problem.”

The Greece Athex Composite rallied 2.8% as shown below from Bloomberg, in spite of the sustained pressures on the European and Asian markets.

While the uncertainty over Greece's debt problems haven't been entirely resolved, the successful bond issuance serves to validate our thesis that the PIIGS problem isn't the likely cause of the current stock market pressures, as discussed in When Politics Ruled The Market: A Week Of Market Jitters.

For the mainstream, it's more about the available bias or seeking of any available event that could be imputable to market action.