Phisix 6,650: Resurgent Gold, Will Mining Sector Lead in 2016? Negative Yield Spread Hits 1 Month Bill-10 Year Treasuries!

There is a serious credit contraction underway, I think [Yellen] should acknowledge that. I think she has to look at the capital base being wiped off the banks in this downdraft and equities: that's not supposed to be happening right now. They're supposed to be bulletproof, and oh, by the way, gold at $1,200 an ounce, what does that tell you? It tells you that in a flight to quality, in a safe haven, people have more confidence in gold than in bank deposits or paper money. I think things have gotten out of control—Robert Michele, JP Morgan Global CIO & Head, Global Fixed Income, Currency & Commodities Group

In this issue

Phisix 6,650: Resurgent Gold, Will Mining Sector Lead in 2016? Negative Yield Spread Hits 1 Month Bill-10 Year Treasuries!

-Global Stock Markets Dive as Faith in Central Bankers Fade

-Has Gold’s Resurgence Been About A Developing Major Dislocation In The Global Monetary System?

-Deepening Strains in the Global Banking System, Singapore as Epicenter for Asian Crisis 2.0?

-Phisix 6,650: Rotation from Mainstream to Mining Stocks, Trend for 2016?

-Gold Miners Lead the Mining Index

-Divergent Trends Between Mining and Mainstream Stocks, The Absence of Domestic Commodity Markets

-Yield Spread of Philippine 10 Year Bonds and 1 Month Bills Turn Negative, Yikes!

Phisix 6,650: Resurgent Gold, Will Mining Sector Lead in 2016? Negative Yield Spread Hits 1 Month Bill-10 Year Treasuries

Global Stock Markets Dive as Faith in Central Bankers Fade

At the end of January I noted that markets seem to have lost faith in central bankers¹

If so, in the next transition from fight to flight, then this would mean that the ensuing cascade should be sharp and fast as central banks have effectively lost control!

With equity markets of developed economies in a freefall last week, the central-bank-losing-control dynamic appears to be gaining momentum.

Despite Friday’s massive stock market rallies, equity benchmark of Europe and the US has closed substantially lower. Friday’s sharp rebound has largely been imputed to the colossal 12% bounce by oil prices, which news say had been about rumors of an OPEC deal or possibly, from liquidations from inverse oil ETF positions or even from both.

Most of Europe’s bourses have lost 3% and above. Peripheral Europe, nations which suffered the debt crisis in 2011-12, bled most. Equity benchmarks of Greece, Portugal, Spain and Italy dived 9.84%. 7.63%, 6.77% and 4.26% respectively. And it’s not just stocks, benchmark sovereign bonds of these nations came under pressure (or bond yields has recently spiked.

The 10 year Greek yield surged to a 7 month high at 11.516%. The Portugal equivalent soared to an August 2014 high at 3.734%. Italy’s yield jumped to a two month high at 1.65% and the Spanish yield increased to a month’s high at 1.739%. If current trends will be sustained, then have these been seminal signs that Europe’s debt crisis returned?

Yet as of Thursday, February 11, the grizzly bears have claimed the global equity markets.

It’s interesting to note that Japan’s Nikkei 225 hemorrhaged by 11.1% from three days of steep losses during the holiday truncated week.

Except for the ASEAN majors, most of Asian bourses suffered losses of 3.5% and above.

Stock markets of China and Vietnam were closed for the week.

Yet if Hong Kong’s stock market should serve as precursor to the China’s performance this coming week, then HSI’s heavy 5.02% losses this week may reflect on bear market forces reasserting dominance on mainland China’s bourses. That’s unless the ‘national team’ goes to work early to offset the selling pressures.

Meanwhile, one of the latest Asian bellwether to fall into the domain of the grizzly bears has been the Australian benchmark, the S&P ASX 200. The S&P ASX 200 crashed 4.24% this week.

On the other hand, India’s Sensex dived 6.62% this week even as the government declared a 3Q (October-December) GDP of 7.3%.

Apparently, some quarters in media have expressed doubt on the methodology of how the Indian government has arrived with its numbers! This week’s meltdown has also brought the SENSEX to the bear market!

This is not to say that actions of central banks will have no effects on the markets. Rather, present dynamics have shown diminishing returns in terms of boosting risk assets. Or said differently, central bank magic has been fading. But it won’t stop them from trying.

Central bankers have been busy this week. Sweden’s Riksbank sent their policy rates deeper into the negative zone. In her Senate testimony, Fed Chair Janet Yellen said that since there “is always some chance of recession in any year” … the Fed would consider negative rates: “ In light of the experience of European countries and others that have gone to negative rates, we're taking a look at them again, because we would want to be prepared in the event that we would need (to increase) accommodation”. 

In addition, the Bank of Japan may call an emergency meeting soon for them “to undertake additional monetary easing if financial markets remain turbulent”. Additionally, the European central Bank was reported to be in talks with the Italian government for the former to buy “bundles of bad loans as part of its asset-purchase programme and accepting them as collateral from banks in return for cash”

It’s truly amazing how central banks have shown even more expressions of panic with financial markets apparently ignoring their overtures and or even actions (such as Sweden’s Riksbank).

But sentiments abroad depart from that of the Philippines.

Yet it has truly been a fascination to observe on how the establishment perceives of the escalating global financial volatilities as having little impact on the Philippine economy or the financial markets. For them, it’s all about the incantation of “domestic demand”. As if domestic demand have permanently been engraved on the economic stone. As if domestic demand occurs automatically, just like manna from heaven. As if prospective losses from exports, tourism, BPOs, OFWs, foreign investments and portfolio outflows would have little or NO direct and indirect effects on jobs, incomes, earnings, investments or consumption.

And if policies of ZIRP and NIRP have been backfiring on economies and markets of both developed and emerging markets, then why should the Philippines, which embraced the same policies in 2009, be immune to such pathology?

Because media ‘experts’ and authorities say so? Because the Philippines is immune to the law of economics? Or has it been because the Philippines, coming off a clean balance sheet prior to 2009, have represented the one of the few nations to enter the late stage of the credit cycle?

The more the misperception the greater the crash

Has Gold’s Resurgence Been About A Developing Major Dislocation In The Global Monetary System?

Last week’s equity meltdown seem to have punctuated a pivotal change in market dynamics: from Risk OFF to Flight to Safety

As stock markets bled ($FAW-FTSE ALL World), gold and government bonds of some developed economies soared.

This week, yields of US 10 and 30 year treasuries fell by 10 bps to 1.748% and by 7 bps to 2.6% respectively. Shown as prices, the 10 year UST soared (lowest window)

On the other hand, gold (main window) rocketed by 5.49% over the week. Gold has surged in 4 consecutive weeks to account for a massive 13.19% in gains. Gold’s surge has been accompanied by a magnificent 10.55% runup of the HUI gold bugs or an index of 15 major gold miners (middle window).

Gold (and UST) appears to have ‘bottomed’ when the FED raised rates in mid-December. Both have spiraled higher when the Bank of Japan announced the NIRP in late January.

In September 2015 I made this recommendation² (bold original)

One should consider hedging against further market volatility or from more episodes of meltdowns or from a torturous bear market in stocks.

So here’s my recommendation, for Philippine residents I recommend to stay in cash, especially in US dollar. Use any USD-peso reprieve to buy the US dollar or sell the peso.

One can add gold (and or gold based assets) to such hedges. Gold may be down today (which makes it a value buy), but this may be a different story when the “real thing” arrives.

And by “real thing” I mean that if the current Emerging Market-Asian-ASEAN market selloffs morphs into a financial crisis, then the USD-PHP high in September 27, 2004 at 56.45 can easily be taken out.

And growing risks of confiscation from indirect means (inflationism) or from direct means (war on cash via negative nominal rates, wealth taxes, deposit haircuts) should spur a reversal in gold.

I followed this up last November with³

So I expect the USD to serve as a lightning rod against stresses that would surface in response to massive imbalances as an outgrowth of central bank policies from all over the world. And once the charade from risks assets have been sloughed off, gold will scintillate.

So far gold has been affirming on my recommendations

Gold as a flight to safety hasn’t been always the case. Gold chart from goldprice.org

Nominal USD-Gold prices fell when the dot.com bubble burst in 2000.

Gold prices plunged during the emergence of the US mortgage crisis or the Great Financial Crisis (GFC) in 2007-2008.

Gold’s secular bullmarket began in 2003. That’s when global stocks bottomed from the dotcom bubble bust. That’s also after the FED went into a series of rate cuts from 6.5% in 2001 to 1.75% in 2003.

Gold also rallied when the FED and various central banks launched their massive rescue programs in the face of the GFC from 2008 onwards.

However, after 11 consecutive (2001-2011) years of annual gains, gold prices peaked in August 2011.

Gold’s climax came a month before the FED announced QE 2.0 (Operation Twist, September 2011) and 6 months after Eurozone finance ministers set up a permanent bailout fund, called the European Stability Mechanism, plus the string of bailouts from the embattled PIGS, which signified the core of the European Debt Crisis.

In the meantime, 3 years after the imposition of gargantuan $586 billion stimulus in November 2008 to shield her economy from the GFC, China’s GDP began its descending path in 2011.

Following gold’s 11 years of successive run ups, cyclically speaking, it would be natural for gold to take a reprieve. So perhaps gold’s 4 year and 5 months old 41.96% downturn signified a cyclical bear market under a secular bullmarket. If this is true then a bullmarket for gold should be in the works.

Yet even as the central banks of US, Europe and Japan and the rest of emerging markets deployed life support policies, which in particular, according to Bank of America Merrill Lynch: 637 rate cuts, $12.3tn of asset purchases by global central banks in the past 8 years, $8.3tn of global government debt currently yielding 0% or less and 489 million people currently living in countries with official negative rates policies (i.e. Japan, Eurozone, Switzerland, Sweden, Denmark)⁴, initially economic performances diverged. Today, economic signals point to a convergence—increasing risk of a global recession.

So maybe gold smelled of the impotency of central bank policies. Perhaps too gold’s bear market instead reflected on the spreading of deflationary forces regardless of central bank actions.

And possibly with Japan’s adaption of the Negative Interest Rate Policy (NIRP), gold may have seen this as a reinforcement of a de facto global central bank policy trend.

Coupled with growing ban on cash by governments mostly under NIRP, the likelihood of imposition of myriad capital controls, prospective bail-ins or deposit haircuts on troubled banks, and or even perhaps outright protectionism, probably gold senses a massive disruption in the banking system, and the large scale drying up of global liquidity as the public gravitate towards cash with gold functioning as an alternative medium of exchange.

In other words, could gold be sensing a brewing or developing major dislocation in the monetary system?

Deepening Strains in the Global Banking System, Singapore as Epicenter for Asian Crisis 2.0?

And signs of such escalating strains seem to have already surfaced in the global banking system.

First, the tightening of “dollar” liquidity, which has created a feedback loop with economic slowdown, has been a key reason for deteriorating bank fundamentals.

The US dollar has been manifesting such dynamic since 2012.

The Bloomberg US dollar index or BBDXY (upper window) has risen by 31.5% from the lows of 2012 through last week. Or said differently, the US dollar has risen against a broad measure of currencies of her key trading partners.

The BBDXY’s distribution share as follows: 34.3% euro, 16.2% yen, 12% Canadian dollar, 9.9% British pound, 8.5% Mexican peso, 5.5% Australian Dollar, 4.9% Swiss Franc, 3.6% Korean won, 3% China yuan and 2.2% Singapore dollar

On the other hand, the JP Morgan Bloomberg Asian dollar index or the ADXY has fallen by 11.6% since 2012. The bulk of Asian currency losses to the USD have emerged from the 2H 2014 through today.

The ADXY’s basket consists of the following: China yuan 38.16%, Korean won 12.98%, Singapore dollar 11.07%, Hong Kong dollar 9.22%, India rupee 8.75%, Taiwan dollar 6.1%, Thai baht 4.92%, Malaysian ringgit 4.23%, Indonesian rupiah 2.85% and the Philippine peso 1.65%.

So rising BBDXY (USD) since 2012 eventually spilled over to as the weakening of Asian currencies in 2H 2014.

Second, has been the recent meltdown of global banking stocks.

Third, has been the transmission of credit risk. The crash of commodity prices has spread to emerging market debt, to high yield bonds and then to bank exposure on vulnerable industries and economies. In short, the deterioration in credit conditions has spread to many industries which leaves banks and other financial institutions vulnerable given years of massive credit expansion.

Fourth, has been an upside spiraling of credit default swaps (CDS) of several major European banks such as Deutsche bank, Credit Suisse and UBS, which means default risk has been rising.

Even additional Tier 1 bank capital in Europe’s banking system has now come under scrutiny.

From Bloomberg⁵:

The volatility and credit spread gyrations seen in the financial space over the past 24 hours may be the consequence of more than just investor unease over Deutsche Bank AG’s ability or otherwise to meet obligations on its riskiest bonds and other debt service costs, Bloomberg strategist Simon Ballard writes.

Rather it probably highlights the extent to which investors have chased yield down the capital structure over the past couple of years and are now left exposed to possible re-pricing risk.

From a regulatory perspective, Contingent Convertible Bonds, known as CoCos or additional Tier 1 securities, were developed to be a strategic funding tool -- a regulatory capital buffer to prevent systemic collapse of important financial institutions. Effectively, CoCos are designed to fail, without bringing down the bank itself in the process. The key problem in understanding the true risk embedded in this asset class, though, might be that it has never been tested. Deutsche Bank, in feeling compelled to reassure investors and employees that it has the solvency to meet its coupon obligations on this riskiest debt may have only exacerbated market uncertainty over, and price reaction in, these assets.

Investor concerns remain over what the overall market impact might be if a bank should see the need to suspend a coupon payment on a CoCo security. Indeed, such a move could make the latest selloff in credit risk look like a mere correction.

Fifth and lastly, a sharp widening of credit spreads in the US and across the globe, as well as negative swap spreads in the US and a sharp flattening of the yield curve in the US and in other developed economies which raises the risk of a US-Global recession.

This has simply been the periphery to the core in motion. And the feedback mechanism from the underlying deterioration in finance has only been spreading to infect the center of credit transmission, the banking system.

Of course it has been interesting to note of the significant deterioration in the US retail industry: as enumerated by Fox business contributor Gary Kaltbaum⁶: Wal-Mart is closing 269 stores, including 154 inside the United States, KMart is closing dozens of stores, JC Penney shutting down almost 100 stores, Macys shutting 36 stores, The Gap closing 175 stores, Aeropostale closing 84 stores,  Finish Line closing 150 stores, Sears shutting 100s of stores and  Massive sales and earnings misses by Kohls, Bed Bath and Beyond, Best Buy, Ralph Lauren and many others.

Not only will the above imply more DEAD shopping malls in the US, these should extrapolate to a wider spectrum of credit risk for the financial system!

The above should be another wonderful template to what will happen to the shopping malls bubble in the Philippines.

Nonetheless, a popular Swiss investor Felix Zulauf who runs Zulauf Asset Management predicts that Singapore will be the epicenter for a banking crisis that will spread to the rest of Asia⁷

"Singapore, which has attracted a lot of foreign capital over the years because of its image as a strong-currency state, will be extremely exposed to the situation in China," Zulauf told Barron's Roundtable in January.

"Singapore's banking-sector loans have grown dramatically in the past five or six years. Singapore is now losing capital, which means the banking industry is losing deposits."

He said this would probably cause carry trades to backfire, triggering heavy losses for those who had borrowed heavily to buy higher-yielding assets.

"I expect a banking crisis to develop in Singapore and to spread eventually to Hong Kong," he said.

So with multiple hotspots for a potential crisis and the risk of prospective confiscation by the government of private funds, it’s no wonder why British bullion dealers reported last week that investors had been “going bananas” over physical gold.

Phisix 6,650: Rotation from Mainstream to Mining Stocks, Trend for 2016?

It’s been a long time since I wrote about the mining stocks.

Well what a week of surprise!

What used to be the most unpopular and ignored sector seem to have stolen the thunder from mainstream stocks.

For three successive weeks, superb gains have made the once dejected the mining sector the recent darling of momentum traders.

The mining sector soared by an amazing 8.55% this week, 9.19% the other week and 4% two weeks back to lift the index back to a positive 2.4% this year.

It’s the only sector with a positive returns year to date.

The mining sector (black candle) has parted ways or diverged from mainstream stocks or the PSEi (blue line). It has missed out on the record boom in May 2013 and in April 2015.

Since May 2012 through January 2016 or in a grueling 3 year and 9 months, the sector’s index has sunk by an agonizing 68.5%. The torturous saga of the mines reveals what a full blown bear market looked like.

Fantastic gains of the past 4 weeks have rendered the said benchmark to be quite overbought.

Regardless of the coming hiatus, or profit taking sessions, the recent actions perhaps may provide clues to what may become the dominant dynamic for the year: will there be a rotation from the mainstream to mining stocks?

Gold Miners Lead the Mining Index

Of course, not all mining stocks are the same.

Based on the mining index, it appears that the best performers had been gold mining stocks.

For the week, Lepanto A and B sizzled by a breathtaking 81.32% and 75.88% respectively!! Philex Mining took second spot up by a phenomenal 25.98%!! Lepanto subsidiary Manila Mining A and B took third spot by posting an exceptional weekly advance of 18.18% and 16.67% correspondingly.

These 3 issues accounted for 30.16% share of the mining index as of last Friday. The biggest weight, coal miner Semirara, which likewise is a PSEi composite issue, fell 3.17% this week. Atlas Mining, the third ranked firm in the index, which includes gold as byproduct, was up 3%.

The rest of the non-gold mining issues were mixed.

Other non-index gold mining issues Benguet Consolidated, Apex Mining, Omico Mining and Alsons Consolidated likewise racked up significant gains, specifically 35%, 24.73%, 17.53% and 8.73% correspondingly.

Only United Paragon Mining (UPM) underperformed with a measly 2.67% advance.

So the sharp gains in the international prices of gold may have been a pivotal factor in juicing up the speculative fervor of domestic participants. As noted above, the HUI gold bugs soared by 10.55% over the week and have been up 47.13% year to date even as gold has only been up 16.78%

Perhaps too, some corporate deals may be at work for Lepanto to have fueled such stark outperformance.

Question now is: have recent activities signified just another vicious bear market rally or the birth pangs of a bull market? The answer entirely depends on the price of gold.

Divergent Trends Between Mining and Mainstream Stocks, The Absence of Domestic Commodity Markets

I do not believe that domestic participants have pumped gold stocks because they see this as a bid on safehaven assets.

Instead, they seem to see this as another opportunity to play the stock market casino.

Both mining index (black candle) and Phisix (blue line) has conjointly dropped in the 4Q and simultaneously rebounded from the massive January selloff.

But while the recent rally in the Phisix (blue) seem to have stalled, the mining index picked up speed to show, possibly and hopefully incipient, signs of divergence. Nonetheless, as of the last quarter, the correlation of both indices moving in the same direction seems greater than the last week’s departure. For now.

Divergence or rotation can only be affirmed when gold mining stocks will move independently from the mainstream stocks. The best evidence will emerge when both will move in opposite directions. This had been the case from 2012 through 2015 when miners collapsed while the bubble industries blossomed. It should be a curiosity to see when both trade places. Time will tell.

Gold miners for me serve as a proxy or titles to claims on physical gold. That’s because spot and futures commodity markets have been missing in a country which sees itself as first world. Yes the Philippines has been the only ASEAN major without a commodity market.

The establishment thinks that they can leapfrog over the commodity backdrop of Philippine economy by blowing property, shopping mall and casino bubbles financed by massive leveraging or credit expansion.

The reality is the commodity (agriculture-mining) industry, even when they constitute a small segment of statistical GDP, employs close to a third of labor force. Such translates to mountains of unlocked savings, investment, demand and consumption.

The absence of commodity markets simply means that productive growth for the sector has lagged behind by virtue of insufficient investments and that the sector remains virtually inefficient as prices have reflected political obstacles than sheer demand and supply.

The absence of commodity markets can also be tied to the lack of interest by the industry to hold savings at the banking sector. That’s because the industry’s financial knowledge and earning potentials have been limited to merely growing/mining and selling their output to politically privileged middle men, rather than through bid and ask in the commodity markets. When farmers and miners learn to directly trade and hedge their produce, output or products, such will allow them to hedge or to reduce their risks and amplify their earnings. Having to increase their level of trade knowledge plus an increase in earnings will surely prompt them to enroll in banks and tap capital markets.

But the BSP would rather go on a publicity campaign on ‘financial inclusion’ rather than deal with real issues

And the reason for the nonexistence of the commodity markets has been politics: there has been too much vested interest rooted in them. The existence of commodity markets should mean a substantial reduction, if not an extirpation, of these politically privileged middle men protected by byzantine regulations and mandates or agricultural protectionism.

So the establishment’s lack of desire to establish commodity markets should translate to local market participants’ little respect for precious metals. Never mind if the peso’s origins were from mainly from a silver standard and a brief period of a gold standard. History has little or no importance to people blinded by present orientation predicated on feel good politics.

Nonetheless, since international prices of gold will serve as the key determinant of the fate of gold shares and if locals have been oriented to follow this correlation, regardless of what they think gold, then domestic gold stocks should resonate with their international peers.

Other potential factors that influence share price movements of domestic gold miners will be the operations side of each miners, as well as, the politics behind the industry and the locality where these mines operate. But this will be subsidiary to the international price of gold.

Yield Spread of Philippine 10 Year Bonds and 1 Month Bills Turn Negative, Yikes!

For the establishment, except for stocks and property prices, all other prices are considered inferior, irrelevant or beyond their definition of numbers based ‘economics’

Yet if international media have raised the issue of flattening of the yield curve abroad as increasing the risk of recession, in the Philippines, the yield curve has no significance at all.

Last week was a milestone in terms of yield spread activities.

As yields of Philippine treasury bills (1,3 and 6 months) spiked, the 10 year equivalent dropped (upper window). The result? The first ever inversion of the yield of the 1 month bill at 3.907% and the 10 year benchmark at 3.826%! Or coupon yields of the 1 month bill has become higher than the 10 month.

The spread between the 1 month bill and the 7 year at 3.75% has also turned negative as the 1 month and 5 year yield at 3.938% has massively flattened.

Because yields of 3 and 6 month bills also spiked, the result has been a massive flattening of the spread relative to the 10 year benchmark.

And it has not just been the front face of the curve, negative spreads have returned to the 10 and 3 year, as well as, the belly of the yield curve the 10-5 year yields.

Not signs of signs of severe monetary tightening?

Disclosure: Writer owns several mining stocks.

____

1^ See Phisix 6,700: Ferocious Bear Market Rally Pump; 4Q and 2015 GDP’s Cosmetic Numbers January 31, 2016

2^ See Phisix 7,050: The Peso in the Face of Crashing Emerging Market and ASEAN Currencies, September 6, 2015

3^ See Phisix 7,100: Surprise! ICTSI Chief Enrique Razon Warns: Another Financial Crisis is COMING!!!! SM Plays with Fire! November 9, 2015

4^ Bank of America Merrill Lynch 637 Rate Cuts And $12.3 Trillion In Global QE Later, World Shocked To Find "Quantitative Failure" Zero Hedge.com February 12, 2016

5^ Bloomberg.com Deutsche Bank’s Assurance Exposes Tip of CoCo Iceberg: Analysis February 10, 2016

6^ Gary Kaltbaum Fox News Business Contributor Our response to the President’s patting himself on the back on 4.9% unemployment rate! garykaltbaum.com February 7, 2016

7^ Australian Financial Review Forget about Europe, investor tips Singapore banking crisis February 10, 2016

Japan's Nikkei Crash 4.84%, Hong Kong's HSI Plummets 1.22% and Korea's Kosdaq Halted After 8% Crash!

Woe to Japan's pensioners. Continuing stock market losses might just bleed Japan's Government Pension Investment Fund (GPIF) dry. The GPIF had been pressured by the Abe administration in 2014 to makeover its portfolio by increasing its exposure in the stock markets (domestic and global). Now stock market losses have been mounting.

It has been a brutal week for the Japanese stock market. Today, the Nikkei 225 suffered another 4.84% crash! Today's slump marks the third consecutive day of heavy losses for the key benchmark this week.

From Bloomberg:

Stocks plummeted in Tokyo, with the Topix index posting its biggest weekly loss since 2008, as global equities plunged into a bear market and the yen rose to its highest level in 15 months.

The Topix sank 5.4 percent to 1,196.28 at the close in Tokyo as trading resumed after a holiday, capping a 13 percent weekly decline. The Nikkei 225 Stock Average fell 4.8 percent to 14,952.61. The yen traded at 112.45 per dollar after touching 110.99 on Thursday, the strongest level since Oct. 31, 2014, when the Bank of Japan eased policy.

“We’ve entered a different phase in the market,” Juichi Wako, a senior strategist at Nomura Holdings Inc. in Tokyo, said by phone. “Dollar-yen movements are at the center as it is now the foreign-exchange market that is in the driver’s seat. We’re at the mercy of how currencies move.”

The currency’s surge is intensifying speculation the BOJ may intervene to arrest gains that threaten to undermine almost three years of monetary stimulus. Finance Minister Taro Aso said Friday the government is watching market movements and will take any action necessary. Following a regular meeting with Prime Minister Shinzo Abe, BOJ Governor Haruhiko Kuroda said he also would watch market moves closely.

Part of the crash has been due to margin calls...

Investors said this week’s declines to below key levels have triggered margin calls among retail traders in Japan, who are being automatically forced to close souring bets. That’s adding to the selling pressure, according to Miki Securities Co.

The Nikkei 225 hemorrhaged a stunning 11.1% in a holiday abbreviated week.

Curiously,  this week's string of losses has brought the Nikkei back lower than when the Abenomics 2.0 was launched in 4Q of 2014. 

So the Abenomics stock market bubble has almost entirely been erased! This should be another wonderful example of the proportionality of bursting bubbles. Or as I previously noted, the bust will be roughly proportional to the imbalances acquired during the inflationary boom. 

And if the GPIF pushed the stocks all the way to the recent top, then today's downside breach of the 15,000 level must translate to heavy losses for the fund.

Well, most of Asian bourses have been under the spell of bears

Yesterday I noted that Hong Kong's Hang Seng index greeted the year of the Monkey (really year of the bears) with a selloff.  A follow thru session was seen today.

From Bloomberg

The Hang Seng Index lost 1.2 percent to 18,319.58, its lowest close since June 2012. HSBC was the biggest drag, capping a 8.1 percent two-day drop, amid concern over the perceived creditworthiness of European banks. Tencent Holdings Ltd., which has the largest weighting on the index, sank 1.9 percent. Hong Kong stocks have lost almost $2 trillion in market value from an April peak, data compiled by Bloomberg show, while a measure of equities around the world fell into a bear market this week.

“Global sentiment isn’t that great and with the world conditions worsening, the Hong Kong market will tag along with that downtrend," said Jackson Wong, associate director at Huarong International Securities Ltd. in Hong Kong. “We didn’t see any panic selling, but we don’t have any extremely positive catalyst to push up the stock market."

Hong Kong stocks extended their worst start to a lunar new year since 1994 as a global equity slump compounded concern that capital outflows, a slumping property market and China’s economic slowdown will hurt earnings. The Hang Seng Index has tumbled 16 percent this year, while the Hang Seng China Enterprises Index is trading at its lowest level since March 2009. Mainland markets resume trading on Monday after a week-long break.

The Hang Seng index fell 5.02% in a holiday truncated trading week.

This week's selloff in Hong Kong's equities maybe a bad omen for the resumption of trading activities in mainland China next week. Will stocks of mainland China crash too? Or will the national team will be active next week to prevent this?

And another noteworthy event today has been the crash of Korea's small cap index the Kosdaq, which prompted for a trading halt.

From Bloomberg:

Trading in South Korea’s Kosdaq exchange for smaller stocks was temporarily halted after the benchmark gauge plunged more than 8 percent on concern valuations were excessive relative to earnings prospects.

Trading was suspended for 20 minutes at 11:55 a.m. in Seoul after the measure dropped 8.2 percent. The index pared declines to 6.1 percent at the close. Celltrion Inc. was the biggest drag on the small-cap measure after the stock almost tripled in the past 12 months. The Kospi gauge of larger companies closed at its lowest level since August.

The Kosdaq index of more than 1,100 companies jumped 26 percent to outperform the large-cap gauge last year as investors piled into biotech shares and other smaller companies in search of earnings growth as smokestack industries stagnated. Celltrion, which developed an arthritis medicine, trades at 42 times projected 12 month profits, four times the Kospi’s 10.5 times.

Investors are selling small-cap stocks as they look for havens amid the global market turmoil, said Choi Kwang Kook, a senior fund manager at Assetplus Investment Management in Seoul.

World equities entered a bear market on Thursday amid concern over the strength of the global economy, while the yen and gold rallied. Korean markets were closed for the first three days of this week for holidays. Today’s 8.2 percent intraday decline by the Kosdaq is the biggest since December 2011.

The Kosdaq closed down by still a huge 6.06% today! 

Nonetheless, Korea's major benchmark the Kospi was spared of the carnage and was down by just 1.41% for the day and 4.3% for the week.

As noted in the report above, bears have now gained control of the world markets. 

For this week, ASEAN majors were spared from the bloodletting suffered by other regional peers. 

Will China's resumption of trading next week induce a uniformity of actions?

Sweden's Riksbank Panics: Sends Interest Rates Deeper Into Negative Zone!

As turmoil slams global stock markets (see Europe's major bourses above--as of this writing) anew, the Swedish central bank the Riksbank seems to have panicked. The Riksbank slashed its interest rates further into NEGATIVE territory.

From the Telegraph

Swedish interest rates have been pushed deeper into negative territory, as the country’s central bank became the latest to introduce monetary stimulus in a world of falling oil prices.

The Riksbank elected to cut its policy rate from minus 0.35pc to minus 0.5pc on Thursday, lower than the 0.45pc anticipated by analysts. Policymakers said that the decision reflected a “stronger economy, but longer period of low inflation”. 

“The Riksbank’s very expansionary monetary policy has helped to strengthen the economy and reduce unemployment,” the central bank said, adding that more stimulus had nonetheless become necessary, as “the upturn in inflation is still not on a firm footing”.

Officials cited disappointingly weak inflation data, and slashed their own inflation forecasts. The Riksbank now expects Swedish inflation to rise to just 0.7pc by the end of the year, as opposed to the 1.3pc it had predicted last December. It also cut its estimates for inflation for 2017 and 2018.

So far, the announcement only spiked the USD-Swedish Krona for a short time as the USDSEK has practically returned to earth....

Deepening of the NIRP has done little, so far, to help the Swedish stock market as seen via the intraday Stockholm 30 index. 

What was supposed to be magic from the Central Bankers seem as being discounted or ignored.

Hong Kong Opens New Year Trading with a 3.85% Slump! Australian Equity Benchmark in Bear Market!

China remains on a week long holiday to celebrate their New Year. Yet curiously, in Hong Kong where financial markets has re-opened today, the latter's stock market greeted the New Year with a slump!

The major bellwether the Hang Seng index plummeted 3.85%. What a way to meet the New Year!

From Bloomberg:

Hong Kong stocks fell in their worst start to a lunar new year since 1994 as a global equity rout deepened amid concern over the strength of the world economy.

The Hang Seng Index slumped 3.9 percent at the close in Hong Kong as markets reopened following a three-day trading closure, during which the MSCI All-Country World Index dropped 2.1 percent. The last time the gauge fell so much on the first day of the lunar new year, investors were worried about the health of former Chinese leader Deng Xiaoping...

Hong Kong’s benchmark equity gauge tumbled 12 percent this year through Friday amid concern that capital outflows, a slumping property market and China’s economic slowdown will hurt earnings. Tuesday’s violence in the shopping district of Mong Kok threatens to deter mainland visitors and worsen a drop in retail sales, according to UOB Kay Hian (Hong Kong) Ltd.

The Hang Seng index have been in a full blown bear market down 34.79% from its April 2015 peak.

Yet today's selloff had been broad based. Such selloff had already been signaled by recent developments at the property sector.

Last week, media reported that Hong Kong's property bubble have begun to hiss...

From another Bloomberg report

In a city that saw demand propel property prices to a record last year, the estimate that transactions reached a 25 year-low in Hong Kong shows how quickly sentiment has turned.

Home prices have slumped almost 10 percent since September and monthly sales in January fell to the lowest since at least 1991, according to Centaline Property Agency Ltd. Amid a spike in flexible mortgage rates this month and anemic demand for new developments, the low transactions volume for January is the latest evidence that prices have further to fall.

The point here is that frail conditions in China's economy has now spread to Hong Kong. Additionally, if equity markets performance of Hong Kong remains weak tomorrow, then this could foreshadow China's trading activities next week.

Worst, the feedback mechanism from Hong Kong's bursting property-stock market bubbles reinforces the emerging economic weakness that will amplify credit problems and which will feed on the ongoing asset deflation. 

So China and Hong Kong's fragile and deteriorating economic and financial conditions are likely to intensify and spread within the region.

Increased social frictions are likewise ramifications of a bursting bubble. The recent riots (called as "fishball revolts") are likely to escalate too.

And speaking of contagion from China, the Australian equity bellwether the S&P/ASX 200 fell into the bear market yesterday.

Today's .95% rebound has brought the index slightly above the bear market threshold. 

Yet this has not just been about contagion, but likewise signs of the unraveling of Australia's domestic asset bubbles.

More and more bourses have been falling into the clutches of the grizzly bears. The escalation of contagion only presages the imminence of a Global Financial Crisis 2.0.

Quote of the Day: Against Political Romanticism

At the Cafe Hayek, Professor Don J Boudreaux explains why he isn't a political romanticist

I’m afraid that I don’t share your enthusiasm for politics, be they democratic or not. Where you “see citizens [at the polls] selecting our leaders,” I see people voting on which power-mad person will crack the whip over those same people and brand and herd them like cattle. Where you are “inspired by candidates campaigning openly to win the election,” I am frightened to realize that one of those hubris-slathered men or women will actually come to possess such power that no man or woman is, or ever will be, fit to possess. Where you are “charged” by the “vigorous debates” among candidates, my stomach is sickened and my intelligence is insulted by the economics-free, fact-strained, and too-often-vacuous talking (and shouting) points that pass for a serious discussion of issues.

And where you say that you “trust voters” more than I trust them, that depends. You’re correct that I distrust people as voters, for in that capacity they largely express opinions on how other people’s (their fellow citizens’) money should be spent and on how other people’s lives should be led. But I trust – perhaps more than you do, and certainly more than do any of the candidates – those same voters as individuals each to spend his or her own money wisely and to lead his or her life well, each according to his or her own lights, without interference or direction from any of the officious, arrogant, and venal candidates seeking power over the lives of other people.

Japan’s Stock Market Crashes 5.4%! Yen Surges! 10 Year JGBs Turn Negative!

I noted last weekend that global central bankers have lost control of stock markets, in spite of recently imposed central bank measures, as well as, promises for more "easing" policies.

I said that “financial markets have apparently grown weary of these central bank elixirs!”

I pointed out how Japan’s stocks, which have been a prime target for NIRP subsidies, has reversed on its early gains. This means that the BoJ's NIRP policy has essentially backfired. 

Well, it appears that my observation had been reinforced today as Japan's major equity bellwether Nikkei 225 crashed 5.4%

From Bloomberg: (bold mine)

Japanese stocks plunged amid a global equity selloff as the yen surged to the highest level against the dollar in more than a year, while financial companies plummeted on growing global unease over profitability and credit quality.

The Topix index sank 5.5 percent to 1,304.33, closing in Tokyo with the largest decline since August. Brokerages and banks led the rout as all of the gauge’s 33 industry groups fell. The Nikkei 225 Stock Average lost 5.4 percent to 16,085.44, its biggest drop since June 2013. The yen surged 1 percent to 114.75 per dollar, the strongest level since November 2014.

“We had a bubble in people’s expectations of the power of central banks. And now we’re seeing that bubble burst,” said Soichiro Monji, chief strategist at Tokyo-based Daiwa SB Investments Ltd. in Tokyo. “Investors are pricing in the fact that central banks can no longer control markets. That became apparent after the Bank of Japan’s last stimulus, and now a similar view is strengthening about the ECB.”

Now even the mainstream admits to the BoJ's failure!

The BoJ’s NIRP was likewise intended to weaken the yen in order to ignite inflation. Well, much to the BoJ's dismay, the Japanese yen has been surging today.

From the same article

Japan’s currency has strengthened against the dollar despite diverging policies taken by each nation’s central bank, with the Bank of Japan last month introducing negative interest rates while the Federal Reserve raised borrowing costs in December and signaled more increases this year. Slowing global growth has pared back trader expectations for at least one U.S. rate hike this year to 30 percent, down from 93 percent at the end of 2015

Another spillover from the BoJ’s NIRP has been to spread negative rates or bond yields to now cover 10 year JGBs

From the same report

Japan’s benchmark 10-year government bond yields dropped below zero for the first time, underscoring the challenge for banks to make money from lending in the world’s third-largest economy. It fell 7 1/2 basis points to a record minus 0.035 percent as of 3:05 p.m. in Tokyo.

Today’s stock market crash was led by banks.

The Topix bank index crashed by a shocking 8.18%!

Also today’s crash basically wiped out the ECB inspired the 5.9% monster rally and has brought the Nikkei back to January 21 lows. 

As I noted then, the fiery rally was nothing more than a dead cat's bounce.

Yet intensifying signs of the reemergence of a global financial crisis can be seen via soaring credit risk.

As another Bloomberg article notes:

Credit markets are grappling with a global selloff that’s sending the cost to protect against company defaults to the highest level in almost four years as investors become increasingly nervous that global growth is slowing.

In the U.S., the risk premium on the Markit CDX North America Investment Grade Index, a credit-default swaps benchmark tied to the debt of 125 investment-grade companies, jumped six basis points to about 120 basis points at 4:02 p.m. in New York, the highest since June 2012. A similar measure for borrowers in Europe jumped to the highest level since June 2013...

Banks and insurers in Europe led a surge in the cost of insuring corporate bonds to the highest levels since 2013.

The Markit iTraxx Europe Subordinated Financial index of credit-default swaps on the junior debt of 30 firms soared for an eighth day, rising 47 basis points to 312 basis points, the highest since March 2013, according to data compiled by Bloomberg. The senior benchmark jumped 18 basis points to 137 basis points, while a measure of U.S. corporate bond risk rose four basis points to 119 basis points, the highest since June 2012...

 

All these reveal to us why bear markets dynamics have been spreading, and intensifying. And if the current momentum will be sustained, then we should the same bubble bursting dynamics in the global financial markets to percolate to the real economy.

 The obverse side of every mania is a crash!

Headline of the Day: The Political Tool Called the OFWs

From today's Inquirer

A belated recognition of risk by the establishment?

Yet from my December 2014 warning:

Yet if oil prices remain at below the cost to maintain the GCC’s and oil producing welfare states which may end up with the cutting of social services, how far before Arab Springs or popular revolts emerge?

And yet how will the blowing up of the Middle East bubble extrapolate to Philippine OFW remittances? More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds. The ongoing crashes in oil-commodity spectrum have already been showing the way.

From my October 2015 note:

Saudi Arabia is state of economic funk. As evidence, she has declared a cut on political spending in response to ‘record’ budget deficit, have been drawing from her foreign currency reserves to bridge this record deficit (forex reserves has plunged 11% from August 2014 highs), Saudi’s sovereign wealth fund has been selling equities (mostly European equities) also designed to shore up her government’s finances, and lastly, statistical GDP has been falling and has been expected to fall further.

Saudi’s plight has not entirely been about oil, but also about her huge welfare state. She has been an active geopolitical player in the Middle East where Saudi forces have been militarily involved in the Yemen civil war against Iran supported Shia Houthi insurgents.

And it has been more than Yemen. The Saudi Arabia government has long helped in the plotting of the overthrow of the Syria’s Assad regime which she has been forthright. 

Syria’s civil war, which is an extension of the proxy war between the US and Russia (aside from Ukraine), has become an enormous humanitarian disaster.

And Saudi’s anti Assad stance brings her directly against the alliance of supporters of the Syrian regime: Russia, Iran, Iraq and China which raises the risks of escalation of war in the region...

In short, if my suspicions are correct, given the economic and political deterioration in the region, hiring trends in the Middle East may have been on a downswing.

This may not even be a recognition of risk.

Why?

Because such headline seems intended to impress upon or mentally condition the public to lay blame the surfacing internal or domestic problems to external forces. 

Yet once this becomes a reality, such dynamic will not prevent the expose of economic and financial imbalances brought about by sins of omission and commission of the government via the BSP's bubble blowing policies.

Moreover, the emergence of such crisis will only be used to impose more interventions to expand the power of the state. As a famous statist dictum goes: Never let a serious crisis go to waste. It's an opportunity to do things you could not do before. 

Finally, in the season of political circus, what more than to use "modern day heroes" or the OFWs as a source for political grandstanding or to generate votes! As if the government can do anything to substitute prospective job losses with their "planning" and "programs"

Yet why worry? Based on government statisticians, economic contributions from OFWs have become inconsequential! 

Said differently, in 2015, all of a sudden, the role OFWs remittances have become trifle to the touted consumer spending meme! Or OFWs have been stripped of their role as " heroes".

Yet as for the consumer spending populist dogma, visit the most popular malls (as I had during the past days) and see how much store turnovers and vacancies have grown! Yet the OFW crisis has yet to arrive.

Happy Chinese New Year!

Wishing you a...

Thanks to my beloved daughter for the graphics