Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand—Ludwig von Mises
In this issue
"The Fed is Done:" Asian-Pacific Currencies, Bonds and Stocks Soar!
I. "The Fed is Done" Spurred a Revival of a Global Asset Mania
II. The Plunge in the US Dollar Powered Asian Currencies and the Philippine Peso
III. Global Risk ON: Asian Bonds Rallied, But Philippine Treasury Yields Increased
IV. Global Stock Market Mania Spills Over to Asia-Pacific
V. The Philippine PSEi 30’s Tepid Gains
VI. Manic Markets Can Only Disguise Risk
"The Fed is Done:" Asian-Pacific Currencies, Bonds and Stocks Soar!
Sensing the comeback of the easy money regime, rampaging bulls powered a meltup in global and Asian currencies, bonds, and stocks.
I. "The Fed is Done" Spurred a Revival of a Global Asset Mania
The Fed is 'done,' a Bloomberg email headline noted.
The Fed’s pause absent its hawkish undertones, a supply shift in US Treasuries towards T-bills, and a disappointing payroll report, among other unimpressive economic data, spurred this week's remarkable upside volatility in the US and global equity markets.
Figure 1
The S&P 500 vaulted 5.85% this week for its best showing since November 2022. Simultaneously, the USD dollar index (DXY) plunged 1.47% while the 10-year UST yield also dived by 5.54%. (Figure 1)
Or, interpreted as a crucial shift into an easing of financial conditions, US capital markets roared.
The week's precipitate boom incited a massive squeeze of shorts, prompted the closures of hedged positions, and revved the trend-following momentum (FOMO).
It also reveals the heft, breadth, and dominance of the US dollar standard system, projected by expectations of Fed policies transmitted into market actions, responses by global central banks, the eurodollar system and the depth of global financialization, which altogether manifests the mounting fragility from a system anchored on escalating leverage from the socialization of financial markets via central bank policies.
Why, then, has the global financial community been fixated or obsessed with the Fed's policies?
Figure 2
And why have many global central banks been on a rate-cutting spree ahead of the FED? Have they "defeated" inflation? Or have their economies been in trouble? See my tweet above. (Figure 2, upper window)
Though the latest numbers of central banks slashing rates are in the non-crisis range experienced in 2013-15 or still way below the spikes of the Great Financial Crisis (2008-2009) and the Pandemic recession (2020-2021), one cannot discount further rate cuts since easy money policies are the only mechanism that contemporary central bankers use to address economic downturns and financial stresses.
Also, the last decade or so can't be a relevant template because it operated on a backdrop of disinflation.
II. The Plunge in the US Dollar Powered Asian Currencies and the Philippine Peso
As proof and in validation of our thesis that the latest BSP rate hike was about the Philippine peso, the Bank for International Settlement recently published the tools of Asian central banks. (Figure 2, graph)
Facing the dual challenges of tight global financial conditions and high inflation since 2022, most Asian EMEs have raised policy rates, but more modestly than in other regions. They have also relied more on a variety of complementary policy tools (eg FX intervention and bond market intervention (BIS, November 2023)
Figure 3
The easing wave hit the global financial sphere; the best-performing currencies in Asia-Pacific included the Philippine peso. (Figure 3, topmost chart)
Even with just two trading sessions in a holiday abbreviated week, the spread abruptly and sharply widened from the serendipitous plunge in the 10-year UST yield in the face of a jump in domestic counterpart. (Figure 3 middle window)
The Philippine peso had its 5th best week since 2020 as the USDPHP plummeted (-1.5%). (Figure 3, lowest graph)
Figure 4
While the Australian and New Zealand dollar rocketed by 2.8% and 3.2%, the cliff dive of the DXY resonated not only with the USDPHP but also with USDTHB (Thai baht). (Figure 4, upper and lower windows)
In any case, the week's drastic moves have yet to become decisive. Or, the mid-term trends remain intact.
Nonetheless, momentum and Friday's added decline of the DXY and 10-year US Treasury yields point to a breach below the USDPHP 56 level.
One week doesn't a trend make. Importantly, domestic fundamentals should eventually reassert their force over market impulses.
III. Global Risk ON: Asian Bonds Rallied, But Philippine Treasury Yields Increased
Figure 5
In the meantime, the rally of the 10-year US Treasury (declining yield) reverberated in Asia. Except for the Philippines and Japan, yields of 10-year sovereign bonds fell. (Figure 5, topmost pane)
This week's steep volatility has barely altered the yield uptrend in most of the 10-year ASEAN bonds. (Figure 5, middle chart)
In the Philippines, the weekly increases in local Treasuries—primarily on the front through the belly—flattened the curve. (Figure 5, lowest window left)
Again, as a caveat, two trading days this week translate to possible distortions as many participants may be on holiday.
In addition, the re-emergence of risk-ON sent Asia's credit default swaps CDS tumbling, which implies reduced concerns over the region's credit risks. (Figure 5, lowest graph, right)
IV. Global Stock Market Mania Spills Over to Asia-Pacific
Figure 6
The Asian-Pacific region's equity markets also resonated with the sudden boom in the bond markets.
Of the 19 national bellwethers, 17 closed the week higher, with an average return of 1.51%.
Outside Pakistan, the benefits of the perceived financial easing fell on the laps Developed Asian bourses.
As the IMF and Pakistan negotiated the 2nd tranche of the $3 billion package, its benchmark KSE 100 soared to an all-time high.
And even as the 2nd biggest weekly gainer, New Zealand's NZ50 remained in a downtrend, while Japan's Nikkei 225 drifted on a flag formation.
China's SSEC (+.43%), Indonesia's JKSE (+.44%), and the Philippine PSEi 30 (+.46%) were among the lesser recipients of the easing conditions.
On the other hand, the euphoria eluded the indices of Laos (-2.58%) and Bangladesh (-.13%).
V. The Philippine PSEi 30’s Tepid Gains
At the PSE, the breadth was slightly positive for the broad market (200 advancers versus 144 decliners) and the main index, the PSEi 30 (18-10 and 2 unchanged).
Mainboard volume jumped 24.9% (average daily) from a week ago to Php 3.59 billion. Yet despite its increase, it has been a long-term downtrend—a reflection of the sordid state of decadent savings.
The coming week should be data-heavy as authorities announce October's statistical inflation (CPI) and the national account (GDP) for the 3Q.
VI. Manic Markets Can Only Disguise Risk
All that said, the easing of financial conditions may goose up the global capital markets for a while. Seasonal factors may contribute to it.
But a capital markets boom defeats the Fed and central bankers' goal of arresting inflation because this would result in the opposite—combust demand in the face of deglobalization and malinvestments.
If markets are expecting "bad news" (slowing or recessionary economy) to transform into good news (asset boom), this could mean a "watch out below" moment.
The world seems to operate in two dimensions (Duoverse). The first thrives on a blissful oblivion (a bubble) unfazed by reality. Or, as the preeminent statistician, author, and philosopher Nassim Taleb described, "denigration of history," where "gamblers, investors, and decision-makers feel that the sorts of things that happen to others would not necessarily happen to them." (Taleb, 2001)
This week's mania rekindled the hope of a credit-driven asset bubble from the crowd desperate for inflationism.
The next is ground reality: mounting socio-economic strains partly vented as bellicose geopolitical relationships and its feedback mechanism on the back of unprecedented credit-financed malinvestments.
Manic markets can only disguise risk but not avoid or eliminate it. It would only exacerbate financial and economic maladjustments.
More than ever, risks from existing and developing imbalances should reveal themselves in the fullness of time.
_____
References:
Prudent Investor, BSP’s Off-Cycle/Emergency Hike was about Protecting Deficit Spending via the Philippine Peso October 29, 2023
Pietro Patelli, Jimmy Shek and Ilhyock Shim, Lessons from recent experiences on exchange rates, capital flows and financial conditions in EMEs BIS Bulletin November 2, 2023 Bank for International Settlements
Nassim Nicholas Taleb Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, Random House Paper Back, p.26
