What are the financial markets responding to?


April 11 ended with the peso going back to 49.58, while the Philippine Stock Exchange index (PSEi) reached 7,601.40. At these levels, the peso has already appreciated by 1 percent and the PSEi has gained 11.4 percent year-to-date. Just about two weeks ago, investors have been jittery over the sideways and lackluster movement of the PSEi and the seeming freefall of the peso toward 51. What is happening with the financial markets? Usually, they move in relation to economic and political news. The most recent economic data that came out points to some weakening to the otherwise strong growth performance last year. Specifically, unemployment rate for January 2017 rose to 6.6 percent of the labor force, up from 4.7 percent posted in October 2016 and from the 5.7 percent in January 2016. Inflation, meantime, reached 3.4 percent, the highest in the last 30 months. The peso breached 50 to $1 in mid-February and the recent pronouncement of Credit Suisse that the country’s current account is reaching deficit levels and that could lead the peso to breach 51 in 12 months.

Our colleague, Dr. Cielito Habito, wrote about these in his column, entitled “Dark Clouds over the economy” (Philippine Daily Inquirer, April 7). He called them “dark clouds” to show that they can potentially derail the current growth trajectory. They seem to beckon a repeat of the boom-bust cycle experienced in the 1990s. Nonetheless, he ended by saying he is not worried because the country continues to be resilient amid the weaker global growth conditions. Indeed, these numbers need deeper corollary analysis. Unemployment, for instance, has risen but the more important measure of quality employment—underemployment has fallen to 16.3 percent of the labor force. This is the lowest in two decades. It is signaling that, while fewer jobs were created recently, the existing jobs are of better quality and of the right hours allowing workers to have sustainable income and job security. Inflation, meanwhile, has risen to the highest levels in two-and-a-half years but this is well within the expectations of analysts and the Bangko Sentral ng Pilipinas (BSP). This is already taking into consideration the erratic price movement of oil and the increase in electricity prices. With expected better agricultural harvest this year, food prices, which comprises about 50 percent of inflation, are seen to remain within their current levels. Thus, our own Eagle Watch forecast see a gradual decrease of inflation to about 2 percent by the end of the year. This will mean that the full-year average will still be below 3 percent. As such, any interest rate increase by the BSP will be more due to adjustments from Federal Reserve rate hike rather than due to inflationary pressures.

Finally, regarding exchange rate, we have previously written that the exchange rate has a fundamental value. This value is determined by its Balance of Payments (BOP) position composed of a current account, which includes trade of goods, trade of services (including business-process outsourcing and tourism), overseas Filipino workers remittances and the capital account, which includes foreign direct investments (FDI) and portfolio investments. The current account reflects the foreign savings generated by the country in its regular trading and operating transactions. The Philippines has been posting surpluses in its current account in the last decade. The highest surplus was about 7 percent of GDP in 2009. It has fallen to about 0.2 percent of GDP as of end-2016. The surpluses has allowed the country to generate more foreign-exchange reserves. As of end-March, the reserves are about $80 billion, or equivalent to nine months of imports. While this has fallen from double digit levels in 2015, it is still way above the three months cover that could potentially lead to devaluation. This, however, does not determine the daily exchange rate. The daily rate reflects the actual market supply and demand for the currency (in this case, the US dollar). The chart below shows the apparent relationship between the peso-dollar exchange rate and the PSEi. Note that when the PSEi rises (+ change), the peso-dollar exchange rate appreciates (- change).

In a market driven largely by foreign funds, this twin effect is observable. Net foreign selling dominated the PSE from January to March. The tide began to turn by April with volume surges leading to net foreign buying. This is notable in the breaking of the 7,400 barrier on April 4 with total volume increasing by 30 percent and foreign buying increasing eight times. The exchange rate went back below P50 on April 6. About the same day, Pulse Asia released its March 2017 Presidential Trust and Performance Survey showing President Duterte’s trust and performance ratings remaining above 75 percent. Meanwhile, two days later the US launched missiles against a Syrian airbase effectively rebalancing the geopolitical landscape of the world. This spooked the global markets, weakening the US dollar and increasing gold prices and the yen. On April 12 the PSEi added another 0.4 percent and the peso appreciated further to P49.48 after Donald J. Trump said the US dollar is too strong for global trade. In a globalized world, financial markets are not beholden to predictable factors. One has to cover and understand how events will ultimately affect the behavior of the investor, whether local or abroad.