PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

Bulls of 1929 like their 1990s counterparts had their eyes glued on improving profits and stock valuations. Not a thought was given to the fact that the rising tide of money deluging the stock market came from financial leverage and not from savings—Dr. Kurt Richebächer 

In this issue 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade 

Has BBM’s SONA Cycle Peaked? While the headline index has shown resilience in July, market internals reveal structural weaknesses. The unraveling of the Yen-Yuan carry-trade increases global contagion risks. 

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

The following post is a follow-up on my July 21st, “The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects” 

Since its interim peak on July 19th, the PSEi 30 has dropped 2.97%—as of the week ending August 2nd—supported by this week’s decrease of 1.79%, marking its second consecutive decline. 

The major Philippine benchmark fell in 5 of the last 9 trading days. 

Interestingly, this week’s larger decrease came as the Philippine government is expected to announce the Q2 GDP—which has been widely projected to outperform—and June’s labor force survey. 

The authorities are also set to release July's CPI print, which the BSP expects to show a bounce from last month.

And it's also earnings season, where the consensus expects Q2 earnings to exceed expectations. 

Meanwhile, the establishment and media have been peddling the idea of the “ghost” month affecting the stock market’s performance, earnings, and the economy. 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

First, let's examine the performance of the Philippine Stock Exchange last July*. 

*Nota Bene:

-The base reference matters. In my perspective, the 2013 starting point represents the real peak of the PSEi 30 based on volume and market internals.

*Annual returns of the PSEi 30 partially represent an apples-to-oranges comparison due to marginal changes in its membership.

*The data indicated reflects nominal returns and not CPI-adjusted or real returns.

Figure 1

Thanks to the pre-SONA pump, the PSEi 30 jumped 3.23%—representing its second-best monthly performance in 2024 and the biggest July returns since 2018. (Figure 1, topmost image)

It was also the largest of the BBM's pre-SONA pumps over the last three years.

On a year-to-date basis, the PSEi 30's meager 2.62% returns signified its best showing since 2019, which highlights the ongoing bear market.  (Figure 1, middle graph)

Despite this, diminishing returns continue to be a scourge on the PSEi 30.

But how about the volume?

Though July's gross turnover was up 11.3% from a year ago, in peso terms, its depressed level, which was almost equal to 2021, reinforced the downtrend since 2015. (Figure 1, lowest chart)

Figure 2 

Gross volume includes the published special block sales and the undeclared substantial share of cross-trades.

In the first 7 months of 2024, gross volume fell by 8.4% year-over-year (YoY) to Php 865.5 billion, marking a third consecutive annual decline. (Figure 2, highest window)

This means that the paltry improvement last July has not been significant enough to cover this year's volume deficit.

The 7-month main board volume likewise dropped 3.69% to Php 702.7 billion, which signified levels below 2018. (Figure 2, middle visual)

Resonating with the gross volume levels in peso, it has been a downhill for the main board volume since peaking likely in 2013.

Amazing.

The more than a decade-long depression in the PSE's gross and main board volume represents the decadent conditions of capital or savings.

It must be emphasized that these volumes have been inflated by foreign trade, pumps by the "national team," and intra-day dealer trades.

In the first 7 months of 2024, the share of foreign participation has risen from 45.44% in 2023 to 48.8% this year. (Figure 2, lowest diagram)

Foreign investors remained marginal sellers, posting Php 27 billion in outflows, their fifth consecutive year of net selling.

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

As for the "national team," the Other Financial Corporations (OFC) could be part of this cabal engaged by authorities to prop up the index.

Clue?

The BSP on the OFC’s activities in Q1 2024: The BSP on the OFC’s activities in Q1 2024: “The QoQ growth in the other financial corporations’ domestic claims was attributable to the increase in its claims on the other sectors, the central government, and the depository corporations. The other financial corporations’ claims on the other sectors grew as its investments in equity shares issued by other nonfinancial corporations and loans extended to households increased. Likewise, the sector’s claims on the central government rose as its holdings of government-issued debt securities expanded. Moreover, the sector’s claims on the depository corporations rose amid the increase in its deposits with the banks and holdings of bank-issued equity shares. (bold added) [BSP 2024]

Figure 3

The growth of OFC’s claims on the private sector slipped from 9.5% in Q4 2023 to 8.5% in Q1 2024, which was also reflected in the claims on depository institutions, whose growth rate decreased from 20% to 13.9%. 

Nevertheless, both claims surged to record highs in nominal peso levels, reflecting the returns of the PSEi 30 amounting to 7% and the Financial Index to 17% in Q1 2024. (Figure 3, upper and middle charts) 

OFCs have not just been funding the government; they have also been propping up the PSE! 

To emphasize, the percentage share of the free float capitalization of the top three banks reached an unprecedented 22.7% of the PSEi 30 last May! (Figure 3, lowest image) 

Though it has slipped, it has remained within a stone's throw of 21.85% as of the week of August 2nd. 

The same banking heavyweights command a whopping 89% of the overall Financial Index pie, which is stunningly higher than the 79% share in the week of July 16, 2023.  

This outgrowth partially reflects the decrease in the number of members from 9 to 7, due to the exclusion of Rizal Commercial Bank and Union Bank. 

The only non-bank member of the index is the Philippine Stock Exchange [PSE:PSE].

Figure 4

The Financial Index has not only starkly outperformed, alongside ICT, electrifying the gains of the PSEi 30, but it has also been absorbing a greater share of the depressed volume of the PSE. (Figure 4, topmost graph)

That is, the uptrend in the Financial Index has climbed along with its estimated volume share of the PSEi 30, comprising 18.15% last June. (Figure 4, middle image)

As such, the concentration of gains in the index has also resonated in the context of gross volume.

To wit, the rising concentration risk comes amidst a declining trend in profit growth of the banking system, where a bulk of it represents accounting profits. For instance, mark-to-market losses are concealed via record Held-to-Maturity (HTM) assets, and BSP relief measures that understate NPLs, etc.

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy

And it is not just banks.

While year-to-date (YTD) gains of the PSEi 30 members have been evenly distributed (as of August 2), the returns of the top five issues have defined the index's performance rather than the overall breadth. (Figure 4, lowest pane)

For instance, the traded volume of the top 20 most active issues increased by 40% this July compared to a year ago and was up by 2.17% YTD 2024 from the previous year.

In the same vein, the volume of the Sy Group soared 46.6% last July from the same month in 2023 and was up 7.3% YTD 2024 compared to a year ago. 

This indicates that the heavy index pumping last July by the Philippine version of the “National Team” amplified the percentage share of the top 20 issues and the Sy Group in the context of volume. 

Meanwhile, the average share of the top 10 brokers increased from 56.98% in July 2023 to 57.6% last month. 

Aside from the sluggish volume, the PSEi 30’s SONA gains have barely been reflected in the PSE’s constellation. 

The advance-decline spread last July 2024 was -150 compared to -166 in the same month a year ago. Again, the PSEi was up 3.23%.

Figure 5

This divergence reverberated in the YTD performance: although negative breadth has become less negative—or price declines have been less intense—a positive sign, they are still declining.  Again, the PSEi was up 2.62% YTD. (Figure 5, topmost diagram) 

Lethargic volume (a symptom of capital consumption), rising risks from the concentration of activities in trading volume (reflecting maladjustment in balance sheet exposure), select stock prices (inflation of mini-price bubbles), broker exposure (increased balance sheet leveraging?), as well as low levels of retail trades (low savings), and rising dependence on foreign trade (increasing reliance on global capital flows) translate to magnified risks of significant downside volatility or simply—a meltdown. 

A stock market meltdown leads to a decrease in collateral values that underpin bank lending, which magnifies balance sheet mismatches, increases illiquidity, and heightens the risk of insolvency within the industry and among its borrowers. It also weakens the balance sheets of investment, pension, and insurance funds (such as the government’s SSS and GSIS), potentially leading to increased capital deficits and further heightening the risk of illiquidity and insolvencies. 

The BSP would likely bail some of these out at the expense of the peso. 

During the stock market meltdown in March 2020, the Finance Chief called on the SSS and GSIS to boost or "rescue" the stock market. The BSP followed this up with record cuts in official rates, historic liquidity injections, and the implementation of various relief measures. The rest is history. 

The BSP implemented ex-Fed chairman Ben Bernanke advise, 

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse (Bernanke, 2009) 

The Philippine version of the national team likely exists for these reasons. 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

Incredibly, the establishment and media continue to entertain and mislead the public with the alleged influence of the so-called "Ghost Month" on stocks or the economy.

Because "Ghost Month" is a superstition rooted in Chinese tradition (religion), the media and establishment's embrace of it assumes that the markets and the economy are driven by Chinese culture, even when the Philippines is predominantly a Catholic population. (Figure 5 middle window)

For example, some BSP literatures cite the "Ghost Month" to rationalize the unexplainable. The BSP should address accusations of their having 'ghost employees' instead. 

The repetitive references to the so-called "Ghost Month" also assume that foreign participation in the financial markets and the economy is influenced by Chinese tradition.

Or, are investors or market participants in the PSE and the economy predominantly of Chinese descent or a practitioner of Chinese traditions?

Some PSE facts regarding the alleged misfortunes of the Ghost Month:

Since the PSEi uptrend from 2003 through 2023, August has closed lower in 14 of the 21 years, or 67% of the time, with an average change of -0.72%. Yet, August 2021 delivered a majestic 9.33% return, the highest since 2000. August 2022 also produced a 4.24% return, the highest since 2008. (Figure 5, lowest graph)

So, what happened to the "Ghosts" of 2021 and 2022? Did the PSEi call upon the movie comedians known as the "Ghostbusters" to foil the rut? Or, have these rallies been a product of the BSP's easy money campaign?

Ironically, the same media and establishment experts have been unanimously silent about the June 17th Ayungin Shoal incident, which involved a standoff between the Philippine and Chinese Coast Guard.

The incident could have triggered World War III—had the US agreed with the Philippines' interpretation, activating the 1951 Mutual Defense Treaty. Unfortunately, the US implicitly gave a cold shoulder to the Philippines, forcing the latter to negotiate and deal with Chinese authorities over the South China Sea. Naturally, the US is opposed to this.

The same echo chamber has been observed ignoring the ongoing shift to a war economy through its embrace of war socialism.

Superstitions are given precedence over facts that matter, translating to the brazen hoodwinking of the public that fomenting war is good for the economy while Ghosts will scare the wits out of investments. 

Won't a war lead to a partial transformation of the living population into ghosts? 

Yet, who would invest in a country on the brink of war? Who would like to see their investment ownership evaporate when enemy drones start wreaking havoc on crucial social, economic, and political edifices, exacting a heavy toll on life and disrupting the division of labor?

But don't worry, stocks and real estate will boom! 

Sorry, but that’s an absolutely stunning imbecilic logic. 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump

The scarcity of local volume translates to amplified vulnerability to volatile foreign sentiment, mercurial fund positioning, and flows. 

Proof?

The massive +4.7% rally by the Japanese yen $USDJPY stole this week’s thunder.

It smashed what the consensus called the “unstoppable” force, a speculative mania. 

To amplify its policy, the Bank of Japan (BOJ) reportedly timed its $36 billion intervention in July to coincide with softening signs in the US economy.

Furthermore, the Chinese yuan $CNY also rebounded by 1.1% week-over-week (WoW). The US dollar index fell by 1.1%. 

The unraveling of the yen and yuan carry trades unleashed a wave of de-risking and deleveraging that rippled across the globe.

Figure 6 

Asian currencies posted substantial gains. (Figure 6, topmost graph) 

The Philippine peso rallied by 0.46%, with the $USDPHP closing at 58.08 and looking poised to fall below the 58 levels and retest the 57.5 area this coming week.

The Philippines led the rally in ASEAN bonds. (Figure 6, middle window) The sharp fall in the 10-year Philippine bond yields strengthens the view that the BSP is about to cut rates.

Furthermore, as signs of mounting strains in the economy emerge, the "belly" of the Philippine treasury curve has also inverted—meaning yields of 2-to-7 year notes have dropped below the 1-year note and partly below the 6-month T-bills. (Figure 6, lowest chart)

Philippine treasuries appear to be defying the BSP’s projected increase in inflation.

Figure 7

The unwinding of the carry trades sent the Japanese stocks crashing.  The yen’s massive rally coincided with the Nikkei 225’s 5.81% nosedive last Friday, to register its 2nd largest one-day decline after the Black Monday crash of October 1987.  The Nikkei was down 4.6% WoW. (Figure 7, topmost and middle charts)

Asian stock markets closed mostly lower. Eleven of the nineteen bellwethers posted deficits, with an average decline of 0.47%. Aside from Japan, the most significant weekly declines were led by Taiwan and the Philippines.(Figure 7, lowest graph)

All of this indicates the magnified contagion risks associated with asset booms driven by financial leverage.

Figure 8 

Risks in the ‘periphery’ have reached the ‘core.’ 

The race to a series of record highs by the S&P 500 $SPX has echoed the PSEi 30’s muted rally in 2024. With the SPX down, the PSEi 30's SONA pump has started to wobble. (Figure 8, highest image)

Foreign outflows of Php 1.6 billion this week have partly resulted in the PSEi 30’s 1.79% decline.

In the backdrop of lethargic volume, concentrated activities, and a rising share of foreign participation, a continuation of global de-risking and deleveraging translates to more liquidations here and abroad, which could expose many skeletons in the closet of the Philippine financial system.

The SONA pumps of 2022 and 2023 not only surrendered all their gains; more importantly, the PSEi 30 closed lower than its base at the start of the pumps. (Figure 8, middle graph)

If history rhymes, the PSEi 30 could fall below its June 21st low of 6,158 during this SONA cycle (post-SONA dump).

Further, when the Philippine peso rallied in 2018 (USD PHP trended lower), it marked the onset of the PSE’s bear market. Will history repeat? (Figure 8, lowest chart)

Importantly, weren't we repeatedly told that easy money would fuel the embers for the rocketing of asset gains?

___

References

Prudent Investor, The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects, July, 21, 2024

Bangko Sentral ng Pilipinas, Q1 2024 Domestic Claims of Other Financial Corporations Rise by 2.8 Percent QoQ and 12.9 Percent YoY, July 31, 2024

Ben S. Bernanke, A Crash Course for Central Bankers, ForeignPolicy.com, November 20, 2009

  

Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next?

 

…the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount…In short, the government and the banking system it controls in effect “print” new money to pay for the federal deficit. Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public—Murray N. Rothbard

In this issue:

Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? 

I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus! 

II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP?

III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets

IV. 6-Months Debt Servicing Costs Hit Another All-Time High! 

V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts 

VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion 

Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? 

The acceleration of June and Q2 2024 spending affirmed the emergence of the "Marcos-nomics stimulus." With debt burdens soaring, a rising public debt stock, and fiscal deficits widening, the BSP may soon cut interest rates.

I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus! 

Businessworld, July 25, 2024: THE NATIONAL Government’s (NG) budget deficit narrowed by 7.24% year on year in June, as revenue collection grew at a faster clip than spending, the Bureau of the Treasury (BTr) said on Wednesday.  Treasury data showed the budget gap shrank to P209.1 billion in June from P225.4 billion a year ago. Month on month, the budget deficit widened by 19.54% from P174.9 billion in May. In June alone, revenue collections jumped by 10.93% to P296.5 billion from P267.3 billion in the same month last year…On the other hand, state spending increased by 2.62% year on year to P505.6 billion in June. “The increase was mostly attributed to the implementation of capital outlay projects of the Department of Public Works and Highways, and the Department of National Defense under its Revised AFP Modernization Program, the preparatory activities of the Commission on Elections for the 2025 National and Local Elections, and the higher National Tax Allotment shares of local government units (LGUs),” the Treasury said. (bold added)

Defense spending. Domestic elections spending (direct and indirect).

Figure 1

Statistical base effects have played a large part in the government and media’s "smoke and mirrors" narrative of fiscal performance last June.  (Figure 1, topmost image)

That is, the lower public spending growth rate was entirely a function of its comparison from a higher base a year ago.

In contrast, distortions from the base effect magnified the revenue growth rate calculated from a lower base last year.

The devil is always in the details.

Yet here are the most important factors that were withheld from the public: 

-June 2024’s public spending was the sixth highest on record. (Figure 1, middle chart)

-Excluding public spending for December, June 2024 represented the third highest after May 2024 and June 2023.

-May and June represented the third-highest two-month public spending.

-Q2 2024 public spending was at an all-time high! (Figure 3, lowest graph)

Figure 2

-June’s deficit was the highest this year. (Figure 2 topmost chart)

-The gap between the 1H 2024 deficit and 2023 widened and was 14.3% and 8.95% below the 2022 and the 2021 historic high. Please take note that the latter two represented a fiscal stimulus in response to the pandemic recession. (Figure 2 middle window) 

Yet, June data was a bullseye for us! 

Authorities admitted that aside from infrastructure, defense, and pre-election spending accounted for its outgrowth. 

That, in essence, is our Marcos-nomics stimulus.

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

…

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May.

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! 

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus." (Prudent Investor, 2024)

In his third State of the Nation Address (SONA), the Philippine President advocated for numerous public spending programs, including "Walang Gutom 2027," a war on poverty measure aimed at feeding one million food-poor citizens by February 2027. He also proposed a nationwide "Free Wi-Fi Program" and promoted "green-lane certified" investments, amounting to approximately Php 3 trillion in business projects (PPPs?) related to renewable energy, digital infrastructure, food security, and manufacturing. He also addressed tourism infrastructure, water projects, and more.

"Marcos-nomics" is on a roll, with more free lunches ahead!

II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP? 

What was the contribution of public revenues to the June and Q2 deficit?

Although aggregate collections reportedly grew by 10.93% in June, non-tax revenues, which experienced a remarkable 81.4% growth rate, comprised the bulk of these gains.

Further, Q2 2024 revenues soared by 16.74%.

This is because, after the April growth surge in collections by the Bureau of Internal Revenue (12.7%) and the Bureau of Customs (19.5%), the subsequent monthly performance almost ground to a halt: both tax agencies registered paltry gains in the following months—BIR grew by 2.8% and 4.7% in May and June, respectively, while the BoC was 4.3% and 0.7% higher over the same period.

Despite this growth, revenue year-on-year (YoY) growth spikes have historically accompanied a GDP slowdown, except for one occasion in 2014. This anomaly aside, revenue growth has typically preceded a slowdown in GDP growth.

The crowding-out effect could be a possible reason for this phenomenon.

Figure 3

So far, revenues from the private sector, which have been involved in government projects, bank lending expansion, and inflation (e.g. CORE CPI), have driven the aggregate performance of public revenues. (Figure 3, topmost and second to the highest diagrams)

Notwithstanding historic public spending, record revenues have also kept the fiscal deficit from spiraling out of control. For now. (Figure 3, second to the lowest chart)

But what if the law of diminishing returns on these factors worsens the current economic conditions?

III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets

In the meantime, after providing a crucial perspective on the aggregates in public spending, we will delve into more details. (Figure 3, lowest graph)

Due to base effects, LGU allocations were up by only 2.6%, a decline from 8.54% in May. However, their share of total expenditures rose from 14.6% in May to 16.6% in June.

Firstly, the Mandanas ruling has also been instrumental in driving this uptrend. The previous spike in LGU collections occurred in the second half of 2021, prior to the 2022 national elections. The collections decreased in late 2022 (post-elections), which extended through most of 2023.

Implemented in 2022, the Mandanas ruling (EO 138) decrees an increased share of revenue allocation from the national government to 40%, which includes collections from the Bureau of Customs.

The second wave of increased allocations to the LGU appears to have emerged since Q1 2024 as the 2025 national elections approach.

Another pillar supporting this is the programmed annual increases in budget allocations.

Increased LGU allocations likely include budgets to market or improve the electoral chances of administration candidates in the 2025 general elections.

Also due to base effects, the National Government’s disbursement grew by 8.6% YoY, though this was substantially lower than 22.32% in May. Nonetheless, its share of the aggregate also declined from 72.5% in May to 69.2% in June.

These increases reflected direct election spending via the Comelec, indirect spending via LGUs, as well as infrastructure and defense allotments.

IV. 6-Months Debt Servicing Costs Hit Another All-Time High!

The thing is, the media has omitted a very critical factor: interest payments. On the other hand, the Bureau of Treasury glossed over the discussion of overall debt servicing costs.

Figure 4

Though interest payments increased by only 5.22% in June, down from 47.8% last May due to base effects, their share of the total rose slightly from 10.97% to 11.01%. (Figure 4, topmost image)

However, total debt servicing in the first semester of 2024 vaulted by 41.3% YoY. It hit an UNPRECEDENTED high of Php 1.283 trillion compared to its semestral predecessors and is down by only 20% relative to last year's annual or the 2023 data. (Figure 4, middle and lowest charts)

Again, compared to 2023, the gap has been closing dramatically: June amortization was only 7.16% lower, and interest payments were down by 39.96%.

Figure 5

Importantly, since 2019, authorities have minimized foreign debt servicing, but this trend appears to have reversed in 2024. (Figure 5, topmost diagram)

Nevertheless, it is incredible to see the media put a spin on the lower monthly external debt-servicing ratio (at the end of April) as 'good news' while ignoring the fact that the external debt-service burden spiked in 2023.  The recent decline likely represents a hiatus. (Figure 5, middle window)

Most of all, the surge in the external debt servicing burden has pulled down the GIR-to-debt service ratio, implying reduced liquidity for debt servicing and other domestic FX requirements. (Figure 5, lowest graph)

And one shouldn’t forget that the Philippine GIR also consists of external debt and derivatives or "borrowed reserves."

V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts

Statistics are about the past. They signify historical data predicated on a limited set of assumptions and barely evince or explain the complex causal relationships that led to these captured outcomes.

The fact that the "Marcos-nomics stimulus" is on a roll means that widening fiscal deficits, which should also reverberate into "trade deficits" and expand the "twin deficits," should escalate public debt levels and, correspondingly, increase the debt burden.

With fiscal deficits likely to bulge ahead, prompting more borrowings, the logical sequence would be for the BSP to cut rates to ease the onus of debt servicing.

And that’s only the argument for Philippine government debt.

The BSP’s case for rate cuts will also involve private sector’s mounting debt burden or systemic debt in general. And that excludes shadow banking or informal finance.

Figure 6

Yet, the current spending dynamics also imply that the Bureau of Treasury’s declining cash position in the face of higher deficits translates to a coming reversal in the recent downdraft in the BoTr’s financing (borrowing), which ironically has been celebrated recently by some quarters. (Figure 6, topmost visual)

Above all, such transfers should worsen the strain on public savings and diminish the amount available for investments.  Rising deficits have coincided with slower growth of bank deposit liabilities. (Figure 6, middle chart)

Therefore, BSP rate cuts represent the next phase of the "Marcos-nomics stimulus."

VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion

With insufficient taxes and borrowings, the government would have to produce more currency to fund it: this translates to higher inflation ahead.

While the government is yet to publish June’s debt burden—slated for next week—banks and other financial institutions have been a primary source of financing for the public debt-financed record deficit and the conduit of unparalleled financial liquidity. (Figure 6, lowest graph)

Banks and financial institutions will be loaded with increasingly riskier government debt.

Figure 7

Furthermore, the BSP’s net claim on the central government (NCoCG), which has shadowed the uptrend in public spending, has fed into the CPI. It will continue to do so. (Figure 7, topmost and middle graphs)

In conclusion, the mounting imbalances from the trickle-down policies manifested by the historic savings-investment gap, supported by an ever-growing dependence on fiscal deficits and asset bubbles to bloat the GDP, translate not only to higher demand for the USD-Philippine peso (USDPHP) but also signify signs of rising systemic risks. (Figure 7, lowest chart)

Inflationary government policies, rather than symptoms like trade deficits and real FX rates, are the root cause of the weak peso. The BSP's interventions may delay or defer its effects, but ultimately, they cannot forestall the inevitable.

Good luck to those who see this as a free lunch for the economy and "bullish" for financial investments.

____

References:

Murray N. Rothbard, Ten Great Economic Myths, September 9, 2023, Mises.org 

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? June 30,2024

 

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects

In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability—John Kenneth Galbraith 

In this issue

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects

I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging?

II. The History of BBM's Pre-SONA PSEi 30 Pumps 

III. Explaining the Index Pump: Concentrated Gains and Rotational Activities

IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume

V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry 

VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth 

VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder

VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency

IX. 2024 SONA Pump: Engineered by Domestic Financial Institutions?

X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion 

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects 

As the Philippine President is about to deliver his third SONA, the PSEi 30 has surged for a fourth straight week to 6,800. What makes these gains artificial? 

I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging? 

The Philippine PSEi 30 closed the week ending July 19th just shy of the 6,800 level. 

Philstar.com, July 20: The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares. The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares… a stronger peso and optimistic economic prospects buoyed local market sentiment… also anticipating the second quarter corporate earnings results. 

In addition to the above, 'strong net foreign buying' contributed to this outperformance. 

Previously, a more prominent explanation had been expectations of rate cuts by the Fed and potential monetary easing by the BSP. 

Financial market news coverage has been mechanically influenced by current events—specifically, the 'availability bias' described in post hoc narratives: because of this event, therefore that. As a result, recent events receive disproportionate attribution and focus. 

However, there seems to be a crucial event missing from this coverage: the political leadership is slated to deliver the annual State of the Nation Address (SONA) on July 22nd, Monday. 

Figure 1 

With a 2.16% advance this week, the PSEi 30 has enjoyed its fourth consecutive weekly winning streak. This weekly gain has propelled the Philippine benchmark to be the second-best performer among its regional peers, following Mongolia’s MSE. (Figure 1, topmost image) 

Remarkably, the PSEi outperformed amidst a prevailing downturn in the Asian market, where 12 out of the 19 national benchmarks closed lower by an average of 0.53%. 

Furthermore, the increased risk appetite for Philippine assets was also reflected in the Philippine peso, which was the only Asian currency to advance this week amidst a strong USD. (Figure 1, middle graph) 

The US dollar index $DXY grew by 0.27% WoW, but eight of the nine regional currencies, excluding Japan, closed lower. 

The USD-Philippine peso $USDPHP retraced by 0.08%, from last July 12’s quote of Php 58.38 to Php 58.335. 

While the yield of the Philippine 10-year bond dived a week earlier, paving the way for its outperformance in the region, it remained unchanged this week as most of the regional peers experienced declines. (Figure 1, lowest diagram)

Figure 2

In contrast, Emerging Asia’s 5-year credit default swap (CDS) exhibited a 520-basis points spike in Philippine CDS (ADB data), indicating that while it comes from a low base, a sustained regional risk-off sentiment could reverse any recent gains. China’s CDS soared by 930 bps. (Figure 2, topmost and middle charts) 

How do the causalities cited by the local media fit into this context? 

The strengthening dollar, falling bond yields, declining stocks, and rising CDS are likely symptoms of de-risking and deleveraging in the face of slowing economies and potential rate cuts. 

Are Philippine stocks and the peso suggesting immunity to this emerging phenomenon? 

II. The History of BBM's Pre-SONA PSEi 30 Pumps

Here is the most important thing the echo chamber has critically missed: 

Since the inauguration of the incumbent President in 2022, the PSEi 30 has enjoyed a series of pre-State of the Nation Address (SONA) pumps. 

The incumbent's previous SONAs were on July 25, 2022, and July 24, 2023. 

From the 6,065.23 trough on June 23, 2022, the PSEi 30 soared to a peak of 6,863.86 on August 19 of the same year, delivering a 13.17% return. (Figure 2, lowest graph) 

The PSEi 30 then surrendered all of those gains and more but found a second post-election honeymoon in October, alongside the UK’s Bank of England (BoE) rescue of its emerging pension crisis, which saw global stocks bottom and reverse to the upside. 

The second SONA pump began on July 7, 2023. It emerged from an interim low of 6,379.03 to reach an interim high of 6,679.13 on July 26, 2023, resulting in a 4.7% return. 

In both instances, the PSEi 30 surrendered all its fleeting gains in no time. 

The third SONA pump came at the temporary bottom of 6,158.48 on June 21, 2024, following the Ayungin Shoal incident. Through July 19th or at 6,791.69, the PSEi 30 has returned by 10.3%. 

How will this time be different compared to its recent predecessors? 

Nota Bene: The SONA pumping cycle doesn’t necessarily end on its actual date, as factors such as momentum and domestic and local liquidity flows may determine its lifespan. 

III. Explaining the Index Pump: Concentrated Gains and Rotational Activities 

Why is it an index pump?

Figure 3

This week's 2.16% gain represents the largest week-before-SONA returns. (Figure 3, topmost chart). The difference between the present and previous environments doesn't provide a relevant comparison or suitable probabilities for making a forecast. For instance, the political-economic landscape of 2009 and 2010 was influenced by the climax of the Great Financial Crisis. 

This week’s gains were once again concentrated on the (free float) market cap heavyweights. 

While it may be true that 20 of the 30 member issues were up this week, the outsized gains of the top 10 issues, which carried an astounding 72% share of the PSEi 30 (as of July 19th), delivered the gist of this week’s 2.16%. (Figure 3, middle graph) 

On average (equal-weighted price change), the weekly return was only .92%. 

The substantial difference between the average and the change in the headline index was principally due to the free float weights. 

And this week’s activities resonated with the last four-week performance. 

Fundamentally, while the PSEi 30 was up 10.3% from June 21st to July 19th, the accrued gains were largely derived from the top 5. 

Again, while 22 of the 30 member issues rose during this period, the average gain was 5.48% indicating the spread caused by distortions of the free float market cap relative to the equal-weighted price change. (Figure 3, lowest visual) 

Moreover, the top 5 issues, which expanded by an average of 15.4%, accounted for most of the 5.5% four-week average growth. 

Figure 4

In addition, the 51.17% pie of the top 5 heavyweights have drifted close to their recent milestone levels, with the index pumps rotating among the heavyweights. (Figure 4, topmost graph)

That is, shifting or rotational pumps from ICTSI to the financial 3 to the other market cap heavies—which presently includes the real estate members! (Figure 4, middle and lowest windows)

IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume

Figure 5

Aside from the incredible pre-closing pumps and dumps contributing to the headline returns, the 2024 version of SONA pumps has emerged against the backdrop of a DETERIORATING mainboard volume! (Figure 5, topmost graph)

As an aside, we omitted posting recent charts of pre-closing massive pumps and dumps to conserve space.

At least there was some volume surge in previous SONA pumps, which is certainly lacking today. And incredibly, little is known about how cross-trades have padded such low-volume pumps.

However, it has not just been the PSEi 30 market cap weightings; the lean trading volume has also been concentrated among the heavyweights.

For instance, the Sy Group's share of the main board volume has been rising in support of the pumps to its shares. (Figure 5, middle pane)

Additionally, the volume share of the top 20 traded issues accounted for 83.6% over the 4-week period, slightly higher than the 83.1% year-to-date. This means that less than 20% of the volume has been dispersed among the other 264 listed companies. Duh!

The PSE noted that there are 284 listed firms as of the second quarter. 

V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry

More to this point:

Although the overwhelmingly dominant share of the top 10 brokers decreased from 59.16% YTD to 57% in the four-week SONA pump, the number of total active participating brokers fell to its lowest level (since I began plotting it). (Figure 5, lowest image)

This means that while transactional volume has spread to a wider scope of brokers, which is good news, the plunge in the active share of participants implies that current conditions have squeezed the marginal brokers, which is bad news.

The PSE also noted that there are a total of 122 active brokers in their Second Quarter Report. 

Could this be confirmation of our prediction that a large segment of marginal brokers will become extinct soon?

And the above data reveals the extent of concentration of trading volumes and trading participants to an elite cabal, who are likely managing the PSEi 30 levels.

VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth

Figure 6

Naturally, the insufficiency in volume and market depth translates to the underperformance of market breadth.

While this week's market internals showed advancing issues marginally higher by 53 against declining issues, from the June 21st low to the present (SONA pump 2024), decliners remained ahead of advancers 1,924 to 1,888, a spread of 36 in favor of decliners.

This means that the headline performance has starkly diverged from the PSE universe. Incredible.

Another likely indicator of general market sentiment is the participation level of traded issues.

Unlike in the prior SONAs where the number of traded issues saw slight increases, we have been witnessing the opposite in the present conditions—a contraction!

The decreasing rate of average daily traded issues accentuates the ongoing liquidity squeeze at the PSE.

Other measures, such as the average daily number of trades and the average daily volume per trade, exhibit the same worsening liquidity drought.

VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder

Yet, for prudent investors, here are some critical points to ponder:

-How can this be a bullish sign when the 10% increase in the Index has been accompanied by a drought in volume supported by stagnant participation and decaying breadth?

-Why would the increasing concentration of the index, trading, and market activities not signify an INCREASING risk to financial stability?

-How could the ARTIFICIAL embellishment of the index signify a bullish sign?

Lastly, why and how would these orchestrated campaigns to impose price distortions not magnify increasing imbalances and malinvestments in the PSE, the local capital markets, and the economy?

VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency

What is the source of financing for the SONA pump?

In essence, savings or credit are the sources of investments (real or financial).

Under the classical gold standard, credit represents the savings of another individual, intermediated by depository institutions.

Under the current fiat money, the US dollar standard, credit can account for "money from thin air."

How has the PSE's low volume signified a sign of increased savings? Or has institutional money been tapping credit for the SONA pump?

Or has the PSEi 30 been reliant on foreign savings and leverage (carry trades)?

PSE data provides some clues:

True, aggregate foreign money flows surged to PHP 2.8 billion this week, the largest since May 17, 2024. 

However, the degree of flow has failed to boost the PSEi 30 during the SONA pump in 2023 and may represent a temporary dynamic today.

As it stands, in the world of global financialization, foreign money flows may account for fund flows by affiliates or subsidiaries of PSE-listed firms registered abroad and offshore firms of allies and colleagues, rather than from money managers in search of higher returns.

These fund flows may be used to artificially inflate statistics to show increased interest by foreigners "to paint the tape."

In any case, while foreign flows cushioned the ongoing decline in trading volume this week, these inflows accounted for a mere PHP 93.6 million from the June 21st trough. 

The spike in this week's flows reveals that foreign flows have largely been absent in the previous three weeks, and it is likely that the 2024 SONA pump has been engineered by domestic financial institutions. 

Our guess: Could this partly be the handiwork of the Maharlika Sovereign Wealth Fund and other government financial institutions? 

More importantly, despite foreign flows, trading volume remains in the doldrums, exposing only the deficiency in savings. 

Yes, the Philippine Statistics Authority declared an increase in gross savings in 2023. However, the broader picture tells us a different story: a marginal rebound following a collapse. 

Yet, questionably, this savings data is determined by GDP! 

IX. 2024 SONA Pump: Engineered by Domestic Financial Institutions?

There are clues pointing to this possibility. 

The SONA pumps may involve Other Financial Corporations (OFCs). 

For instance, according to BSP data covering Q3 2023: "Based on preliminary results of the Other Financial Corporations Survey, the domestic claims of the other financial corporations grew by 2.4 percent in Q3 2023… the other financial corporations’ claims on the other sectors, particularly the private sector, grew as the sector extended more loans to households and increased its holdings of equity shares in other nonfinancial corporations" (bold added)

Figure 7 

Claims on the private sector surged at the end of Q2 2023 going into Q3 2023. (Figure 7, topmost graph) 

Did flows from the OFCs account for the SONA 2023 pump? 

What about in 2022? 

While the Q3 2022 data was silent on claims on the private sector, the reversal from outflows in Q2 2022 could have been indirectly responsible for the June to August 2022 SONA pump, which delivered a 13% gain. 

X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion

Furthermore, signs of accelerating liquidity growth could extrapolate to money diffusion into the PSEi 30, channeled through orchestrated or engineered asset pumps. 

May's fourth largest public spending, possibly representing an early-stage distribution of liquidity from the pre-Election "Marcos-nomics stimulus," may also have been used by banks and non-bank financial institutions for the 2024 SONA pump. 

This has a precedent. 

An uptrend in the growth of cash in circulation financed the previous national (Presidential) elections, which percolated into the pumps of SONA 2022 and the 2022 post-election stock market honeymoon. 

Another factor was the spillover from the historic PHP 2.3 trillion liquidity injections in 2020-2021 by the BSP to rescue the banking system—which was sold to the public as benefiting the economy. 

An uptick in the growth of cash in circulation from April to October 2023 also supported the 2023 SONA and the Q4 2023 rally in the PSEi 30. 

How does this apply to the present? 

May 2024's cash in circulation growth of 6.1% represents the highest level since December 2022, which fund flows have likely spurred this SONA 2024 pump. (Figure 7, middle image) 

It is unsurprising that a substantial part of liquidity growth has been partly funded by bank credit expansion. 

Universal Commercial Bank lending growth, which may have been used to finance pre-election spending in 2021-2022, has been manifested in the pumps of SONA 2022 and the post-election honeymoon. And its reduced growth may have depressed the returns of the SONA 2023 pump. (Figure 7, lowest chart) 

Finally, the accelerating UC bank lending growth from Q4 2023 to the present has been instrumental in financing the 2024 SONA pump. 

As previously explained, though disinflation could prevail in the interim due to the slowing real economy, supported by the rise in non-performing loans (NPLs), which may constrain the uptrend in bank lending, sustained increases in deficit spending should put a floor on inflation. 

A resurgence of inflation, which should cap interest rate cuts, will further expose imbalances and malinvestments resulting from all these orchestrated attempts to create an artificial economic and financial boom through credit expansion, price manipulation, and statistical artifices. 

Although the political leadership did not explicitly mention the stock market to boost his political capital during the previous SONAs, the message—implying "strong earnings growth ", "optimistic economic prospects", a "stronger peso," and so on—represents the commonplace conveyance by institutional mouthpieces in explaining the recent spike in the PSEi 30. 

However, when everything goes off the rails, it has to be either the US Federal Reserve or something foreign, but hardly ever local affairs (attribution bias). 

QED.