Morning Brief: 29 June 2011

Country said to have lost liquor tax dispute BRUSSELS/MANILA -- Taxes levied by the Philippines on alcoholic drinks from the European Union and United States are illegal under global rules, the world’s trade dispute body ruled on Monday, according to sources close to the case.Washington’s envoy in Manila said he welcomed the decision, while the Philippines’ tax chief -- insisting that the duty system was not discriminatory -- said it would be up to legislators to change relevant laws. Sources said that a World Trade Organization (WTO) legal panel, in a confidential report circulated to the parties involved in the dispute, had ruled that the Philippines’ taxes discriminate against brands such as Jack Daniel’s and Jim Beam as well as Spain’s Brandy de Jerez, while favoring domestic producers catering to the country’s $3-billion spirits market. The ruling is confidential until its publication in August, and trade officials for the EU and US were unable to comment on its contents. But it is being eyed keenly by Spanish brandy makers and US firms such Brown-Forman Corp. , which owns Jack Daniel’s, and Fortune Brands Inc., which makes Jim Beam. “We have long questioned the Philippines’ discriminatory tax approach. We are optimistic of a positive result from the WTO panel, which will be particularly welcomed by Spain since Spanish brandy constitutes the main EU spirits export to the Philippines,” said Jamie Fortescue, director general of the European Spirits Organization. The ruling dismissed Manila’s argument that imported whiskey and brandy do not compete with locally made alcohol and that differing taxes -- set according to the raw material used -- should therefore be legal, sources said. It found that the purpose of a lower tax on domestic alcohol that can be directly substituted for imports was to protect domestic producers, an illegal aim under WTO rules. The EU, whose annual global spirits exports amount to about 7 billion euros ($10 billion), blames the tax for halving EU spirits sales to the Philippines between 2004 and 2007 to 18 million euros. Brussels lodged a WTO challenge against the Philippines in January last year. The United States, which followed suit with a similar challenge in April last year, similarly says the Philippines’ tax system -- imposing duties 10-40 times higher on spirits not distilled from materials such as sugar cane and molasses produced in the Philippines -- means it has failed to gain more than 5% of the country’s market. In Manila, US Ambassador Henry K. Thomas said Washington welcomed the WTO’s preliminary decision. “The US looks forward to a level playing field in the country, since the consumer benefits with fair prices even from goods coming from outside the Philippines,” Mr. Thomas Jr. said at the sidelines of a Management Association of the Philippines press conference. Bureau of Internal Revenue (BIR) Commissioner Kim S. Jacinto-Henares, meanwhile, said it would be up to Congress to amend the country’s tax laws once the WTO ruling becomes final. “I will still collect excise taxes, as stated in the National Internal Revenue Code (NIRC). There will be no changes until Congress amends the law,” Ms. Henares told BusinessWorld. Under Section 141 of the NIRC, alcohol products produced from the sap of nipa, coconut, cassava, camote, buri palm or from the juice, syrup or sugar of the cane are charged an P8 excise tax per proof liter. Alcohol products not made from the identified raw materials are levied an excise tax of between P75 to P300 per proof liter Imported spirits tend to fall under this category because they are usually made of barley, wheat and grapes, Ms. Henares explained. -- reports from Reuters, Diane Claire J. Jiao and Eliza J. Diaz Debt exchange rescheduled due to approval delay A PLANNED local bond swap could be launched next week after delays in documentary approvals pushed back the offer from yesterday’s target, a treasury official said. The government had said it wanted to swap shorter-dated local bonds for new 10-year and 20-year on June 28, with the offer period to be closed in the first week of July, and settlement a week after. “We will have to reschedule the launch. If we get the approval [from the Office of the President] this week, the launch can happen next week,” Deputy Treasurer Eduardo S. Mendiola said. On Monday, National Treasurer Roberto B. Tan said the Bureau of the Treasury had obtained an opinion from the central bank supporting the planned debt exchange. First Metro Investment Corp., BPI Capital Corp, SB Capital Investment Corp and Citibank are joint deal managers of the swap, along with the Development Bank of the Philippines and Land Bank of the Philippines. Manila is taking advantage of strong investor interest in emerging markets to lengthen its debt maturity profile. Following swaps in the second half of last year, the Philippines’ average debt maturity lengthened to 8.8 years at end-December from 7.9 years in June 2010, with the average foreign debt maturity at 11.4 years. -- Reuters

U.S. Stocks Rise Amid Greek Bailout Expectations as Nike Jumps U.S. stocks rose, sending the Standard & Poor’s 500 Index to its highest level in three weeks, amid optimism European nations will take action to prevent a Greek default and after Nike Inc. (NKE)’s earnings beat estimates.Nike rallied 10 percent as higher North American sales helped the world’s largest sporting-goods company top profit projections.Caterpillar Inc. (CAT), Exxon Mobil Corp. (XOM) and Alcoa Inc. (AA) added at least 2.1 percent, pacing gains in companies most-tied to economic growth. Home Depot Inc. (HD) climbed 2.4 percent after the largest U.S. home-improvement retailer said that it is targeting about $3.5 billion in share repurchases for 2011. The S&P 500 advanced 1.3 percent to 1,296.67 at 4 p.m. in New York, rising to the highest closing level since June 3. The Dow Jones Industrial Average increased 145.13 points, or 1.2 percent, to 12,188.69 today. More than 6.1 billion shares changed hands on U.S. exchanges at 5:12 p.m., 14 percent less than the three-month average through yesterday. Treasuries Tumble as Five-Year Note Auction Demand Falls to Lowest in Year Treasuries fell, pushing five-year note yields up the most since January, as speculation Greece’s lawmakers will approve austerity measures cut demand at the $35 billion sale of the maturity to the lowest in a year. Benchmark 10-year debt pared a monthly gain, pushing the yields above 3 percent on reduced concern Europe’s debt crisis will undermine the global economic recovery. The five-year note auction’s bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.59, the lowest since June 2010. “It was a weak auction,” said Sergey Bondarchuk, an interest-rate strategist in New York at BNP Paribas SA, one of the 20 primary dealers obligated to participate in U.S. debt offerings. “People are not really bullish at these rates because if there are hints of improvement out of Greece, that could take yields higher.” Yields on current five-year notes increased 13 basis points, or 0.13 percentage point, to 1.58 percent at 5:14 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent securities maturing in May 2016 dropped 5/8, or $6.25 per $1,000 face amount, to 100 26/32. The five-year note yields earlier climbed 16 basis points, the most on an intraday basis since Jan. 5, to 1.61 percent, the highest level since June 15. The yields fell yesterday to 1.35 percent, the lowest since Nov. 23.

Crude Oil Rises for Second Day on Greek Vote Optimism, U.S. Stockpile Drop Oil rose for a second day in New York after a report showed U.S. crude supplies dropped for a fourth week and amid optimism Greek lawmakers will approve austerity measures to prevent a debt default.Futures increased as much as 0.6 percent after climbing the most in six weeks yesterday. Greek Prime Minister George Papandreou’s 78 billion euro ($111 billion) plan to cut spending and sell assets is set for a vote in parliament today. Crude stockpiles dropped 2.7 million barrels last week to 360.3 million, according to the American Petroleum Institute. “There’s great hope that this plan for Greek debt will help turn the corner,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “It’s optimism that the Greeks aren’t going to default and the euro is not going to break up.” Crude for August delivery advanced as much as 51 cents to $93.40 a barrel in electronic trading on the New York Mercantile Exchange, and was at $93.10 at 8:54 a.m. Sydney time. The contract yesterday gained $2.28, or 2.5 percent, to $92.89. Prices are 23 percent higher the past year and down 12 percent in the second quarter. Brent oil for August settlement climbed $2.79, or 2.6 percent, to $108.78 a barrel on the London-based ICE Futures Europe exchange yesterday. The European benchmark traded at a premium of $15.89 to West Texas Intermediate, the U.S. benchmark grade. The spread reached a record $22.29 a barrel on June 15.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com 

BDO UNIBANK INC. 

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher 
(632) 858-3001 

Morning Brief: 28 June 2011

PPPs on track despite delays -- gov’t CONCERNS over the rollout of public-private partnership (PPP) projects have been downplayed by Cabinet officials, who nonetheless admitted that schedules for several deals had been pushed back.Secretary Cesar V. Purisima claimed that at least 10 projects -- out of an original list of 12 -- would be offered this year. "We are continually talking to investors. We can start at least 10 projects this year," he told BusinessWorld last week at the sidelines of a press briefing where he also said the government does not want to rush the implementation of the centerpiece infrastructure program. "We want to build a good, sustainable foundation. We don’t want our projects to be questioned and not stand scrutiny," Mr. Purisima said, bringing up the example of the Ninoy Aquino International Airport (NAIA) Terminal 3 project that began in 1997 but is still riddled with legal troubles and corruption allegations to this day. Public Works Secretary Rogelio L. Singson, for his part, said three of four PPP projects under his department would push through this year despite slight delays. He said the Public Works department briefed interested investors last Friday on the Daang Hari-South Luzon Expressway link and the NAIA expressway projects, priced at P1.6 billion and P10.59 billion, respectively. "We met with investors, contractors and bankers. It was a good crowd of about 100 people," he told BusinessWorld yesterday. Mr. Singson said the briefing gave investors a chance to raise comments about the general terms of reference of the two projects, adding that these views would be taken into consideration before final details are published. The National Economic and Development Authority still has to approve the Daang Hari and NAIA expressway projects -- a meeting on the matter is scheduled this week -- but Mr. Singson claimed that investors could look forward to the publication of invitation to bid within the first half of July. The government had initially promised to roll out the Daang Hari project in April and the NAIA expressway project in May. Two more projects -- the North Luzon-South Luzon expressway link estimated to cost P21 billion and the P10.5-billion Cavite-Laguna expressway -- will also be delayed, Mr. Singson said, with the former’s rollout to be pushed back to August from June and the latter to be offered next year instead of this December. PPP deals under the Transportation department could also be up for rollout changes. "The schedule of DoTC (Department of Transportation and Communications) PPP is being reviewed and updated. We’ll announce the updated schedule as soon as project preparations are firmed up," Undersecretary for Planning and Project Management Ruben S. Reinoso, Jr. said in a text message to BusinessWorld yesterday. The only PPP deal in a relatively advanced stage, the P15-billion four- to five-year maintenance and operations contract for the Light Rail Transit Line 1 and the Metro Rail Transit Line 3, has likewise been hit by delays. The government initially set a July 11 deadline for bid proposals but this was deferred to give incoming Transportation Secretary Manuel "Mar" A. Roxas II time to study the project contract. "The project was decided during the time of [outgoing Transportation Secretary Jose P. de Jesus]. [Mr. Roxas] may want a different approach, so we will give him room," Mr. Purisima said.

U.S. Stocks Advance After Regulators Issue New Banking Rules U.S. stocks rose, sending the Standard & Poor’s 500 Index higher for the first time in four days, after regulators issued new capital rules to safeguard the global financial system, offsetting an unexpected stagnation in American consumer spending.Apple Inc. (AAPL) rose 1 percent after Morgan Stanley said the company’s order cuts will ease and production of iPhones and iPads will begin “ramping aggressively.” Stanley Black & Decker Inc. (SWK) gained 1.4 percent after the tool company offered to buy Sweden’s Niscayah AB for $1.2 billion. DuPont Co. and Alcoa Inc. (AA) fell, and the S&P GSCI Index of 24 commodities sank to the lowest level since January as oil and metals prices fell. The S&P 500 rose 0.4 percent to 1,273.88 at 9:53 a.m. in New York. The Dow Jones Industrial Average gained 66.49 points, or 0.6 percent, to 12,001.07. Treasuries Drop as Record Low Yield Saps Demand at Two-Year Note Auction Treasury two-year note yields increased the most since April as speculation Greece’s lawmakers will approve austerity measures reduced demand at the U.S. government’s $35 billion auction of the securities. Indirect bidders, an investor class that includes foreign central banks, purchased 22 percent of the notes, the lowest in more than three years. Thirty-year bonds were the worst performing Treasuries, increasing the difference in yields with two-year securities to the widest since March. “A lot of people weren’t prepared for a bad two-year auction,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Now it’s all hands on deck for tomorrow to see if we’re going to get hit again with a bad five-year note auction. I guess rates really do matter to the average investor.” Yields on current two-year notes gained seven basis points, or 0.07 percentage point, to 0.39 percent at 5:20 p.m. in New York, according to Bloomberg Bond Trader prices. The 0.5 percent security maturing in May 2013 fell 1/8, or $1.25 per $1,000 face amount, to 100 6/32. The two-year note yields advanced the most on an intraday basis since April 27, when the Federal Reserve said it would complete its $600 billion program of debt buying on schedule at the end of June. The yields fell on June 24 to 0.32 percent, the lowest level since Nov. 4, the day after the central bank said it would resume buying debt.

Crude Oil Rises From Four-Month Low in New York on U.S. Economic Outlook Oil rose in New York as speculation the U.S. economic recovery is on track prompted investors to buy contracts after prices fell to the lowest in four months.Futures climbed as much as 0.9 percent before a report today that may show a rebound in consumer confidence in the U.S., the world’s biggest oil consumer. Prices yesterday slid after Commerce Department data showed consumer spending stagnated in May. “I’m not really worried about demand growth,” said Tetsu Emori, a commodity-fund manager at Astmax Ltd. in Tokyo. “Ninety-dollars seems to be quite firm support at the moment and current fundamentals make selling below $90 too risky.” Crude for August delivery rose as much as 80 cents to $91.41 a barrel in electronic trading on the New York Mercantile Exchange. It was at $91.30 at 7:52 a.m. Singapore time. Yesterday, the contract fell 0.6 percent to $90.61, the lowest settlement since Feb. 18. Futures have gained 17 percent in the past year. The Conference Board’s index of U.S. consumer confidence, scheduled for release today at 10 a.m. in New York, will climb to 61 in June from 60.8 in May, which was the lowest in half a year, based on the median estimate of 69 economists surveyed by Bloomberg News.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com 

BDO UNIBANK INC. 

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher 
(632) 858-3001 

Morning Brief: 24 June 2011

Fitch upgrades Philippines’ credit rating Firm cites improving gov’t fiscal position By: Michelle V. Remo and Ronnel W. Domingo Philippine Daily Inquirer The Philippines enjoyed another boost to its international image as Fitch Ratings upgraded the country’s credit rating to just a notch below investment grade.With the decision, the Philippines’ credit rating on its long-term foreign obligations now stands at BB+, an improvement from the previous BB. “The upgrade reflects progress on fiscal consolidation against a track record of macro stability, broadly favorable economic prospects and strengthening external finances,” Andrew Colquhoun, head of Fitch’s Asia-Pacific sovereigns, said in a statement. According to Fitch’s projections, the Philippine government’s budget deficit for 2011 would stand at 3 percent of the country’s gross domestic product, an improvement from the 3.7 percent registered last year. Fitch said the country was on track in meeting its medium-term fiscal development goals, citing recent improvements in revenue collection by the government. Revenue collection grew 18 percent in the first four months from the same period a year ago, it noted. The credit-rating firm said that should revenue collection growth continue, the county was well poised to reduce its overall debts over the medium term. The country’s debts stood at 57 percent of its GDP in end-2009, but Fitch said there was a chance the figure could decline to 50 percent by end-2013. The upgrade by Fitch of the country’s credit rating came after Moodys raised the country’s credit rating to two notches below investment grade earlier this month. The favorable credit actions came following pronouncements by the country’s finance and monetary officials that upgrades were overdue as they cited better economic figures for the country. Finance Secretary Cesar V. Purisima said the government would strive to attain its goal of investment grade-credit rating “at the soonest time possible.” “The Fitch upgrade is the fourth positive ratings action in the 11 months of the Aquino administration and is unprecedented in Philippine history,” Purisima said. The finance chief said Fitch’s move was another “objective vote of confidence” that the Philippines was headed in the right direction. “There will be no letup in our campaign to prosecute, convict and jail tax evaders and smugglers,” Purisima added. “We will work doubly hard to ensure that the investment-grade rating comes sooner rather than later.” “The Philippines’ strengthening credit profile continues to be internationally recognized by both markets and the rating agencies. Today’s upgrade from Fitch Ratings brings the Philippines one notch closer to investment grade status and is a clear acknowledgement of the country’s improving macroeconomic fundamentals,” Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said.

U.S. Stocks Decline on European Woes as Jobless Claims Increase U.S. stocks slumped, sending the Standard & Poor’s 500 Index down a second day, as concern grew that Europe’s debt crisis will hurt banks and an increase in jobless claims added to signs the economy is slowing.JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) fell at least 1.2 percent as European Central Bank President Jean-Claude Trichet said the debt crisis threatens to infect banks. Chevron Corp. (CVX) and Exxon Mobil Corp. (XOM) dropped more than 1.6 percent as oil erased its gains for the year. Stocks pared losses as Greece had reached an agreement with the European Union and International Monetary Fund regarding an austerity plan that would help it win more financial aid. The S&P 500 declined 0.3 percent to 1,283.50 at 4 p.m. in New York. It has gained 2.1 percent so far in 2011. The Dow Jones Industrial Average retreated 59.67 points, or 0.5 percent, to 12,050. It’s up 4.1 percent this year. Treasury Two-Year Yields Drop to Lowest in 2011 on Jobless Claims, Greece Treasuries rose, pushing two-year yields to almost a record low, as unemployment claims climbed last week more than forecast and on concern Greece will struggle to pass austerity measures. Yields on 10-year notes dropped the most in a week a day after the Federal Reserve said it will maintain monetary stimulus after its $600 billion program of debt buying ends this month, with policy makers lowering forecasts for growth. The $7 billion auction of 30-year inflation-indexed debt drew a lower yield than dealers forecast. “It can all be boiled down to uncertainty,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of the 20 primary dealers obligated to participate in U.S. debt offerings. “The data came in weaker than expected. There continue to be concerns over Greece.” Yields on two-year notes fell three basis points, or 0.03 percentage point, to 0.35 percent at 5:08 p.m. in New York, according to Bloomberg Bond Trader prices. The 0.5 percent security maturing in May 2013 increased 2/32, or 63 cents per $1,000 face amount, to 100 9/32. The yields touched 0.33 percent, the lowest level since Nov. 5. The day before that, they fell to a record low 0.3118 percent. Benchmark 10-year note yields dropped seven basis points to 2.91 percent after falling 10 basis points, the most on an intraday basis since June 15.

Oil Rises on Concern IEA Crude Release May Limit Future Supply Responses Oil rose in New York, reversing yesterday’s plunge, on concerns that stockpile releases by consuming nations may limit the ability to respond to supply disruptions in future.Crude climbed as much as 1.5 percent today after sliding 4.6 percent yesterday. The International Energy Agency agreed to release 60 million barrels to buyers. Oil stockpiles among the 28 member countries of the IEA declined by 340,000 barrels a day during the first quarter of this year, the Agency said in its monthly Oil Market Report on June 16. “The more stocks you use now, the less of a buffer you have for any supply shock in the future,” said Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. in Melbourne, who predicts oil in New York will average $113 a barrel in the third quarter. Crude for August delivery climbed as much as $1.32, or 1.5 percent, to $92.34 a barrel in electronic trading on the New York Mercantile Exchange and was at $91.89 at 7:53 a.m. Singapore time. The contract yesterday slid to $91.02 a barrel, the lowest settlement since Feb. 18. Prices are up 20 percent the past year.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com 

BDO UNIBANK INC. 

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher 
(632) 858-3001 

Morning Brief: 22 June 2011

Philippines seen to sustain high revenue collection, lower spending The government is expected to maintain a trend of higher revenue collection and lower spending following a P61-million budget surplus posted in the first four months, according to DBS Bank. The Singapore-based bank said in a new research note that based on the positive numbers so far, the Philippine government was on track to reach its goal of reducing its budget deficit to 3.1 percent of gross domestic product, or to P290 billion or less. DBS made the comment ahead of the release of the country’s latest fiscal data later this week. “Consolidation will be the main theme for the Philippine budget for 2011,” DBS said. “Indeed, in the first four months of this year, revenues were up by 13.2 percent year on year while expenditures were down by 13.4 percent year on year.” The bank noted that the Philippine government had “a fair record in managing its fiscal accounts over the last decade,” with the budget balance registering an average deficit of 2.9 percent of GDP. In 2010, Malacañang reported a deficit of 3.5 percent of GDP, or P314 billion. Earlier, Budget Secretary Florencio B. Abad said the Aquino administration had kept the deficit within target for 2010 because of improved revenue collection in the latter part of the year, coupled with the exercise of prudence in management expenses. Abad said that with this, it was possible to achieve the immediate goals of reducing the ratio of deficit to GDP to this year’s target through 2.6 percent in 2012 and 2 percent in 2013. Last week, the Bureau of Internal Revenue said it collected P88.16 billion in May, rising 11.5 percent from the P79.05 billion posted in the same month last year.

U.S. Stocks Advance as Concern About Greek Debt Default Eases U.S. stocks advanced, sending the Standard & Poor’s 500 Index higher for a fourth straight day, as concern about Greece’s debt crisis eased. Wells Fargo & Co. (WFC) and Citigroup Inc. (C) rose at least 1.8 percent, following a rally in European banks, as Greece’s government faces a confidence vote that may determine whether it avoids a default. Caterpillar Inc. (CAT), Alcoa Inc. (AA) and Hewlett- Packard Co. added more than 0.8 percent, pacing gains among companies most-tied to economic growth. Best Buy Co. climbed 2.7 percent as the largest consumer electronics retailer set a $5 billion share repurchase plan and raised its quarterly dividend. The S&P 500 rose 1.3 percent to 1,295.52 at 4 p.m. in New York. The Dow Jones Industrial Average added 109.63 points, or 0.9 percent, to 12,190.01. The Nasdaq Composite Index gained 2.2 percent to 2,687.26, reversing its 2011 drop. The Russell 2000 Index of small companies increased 2.3 percent to 806.37. “We expect the confidence vote in Greece to go well,” said Philip Orlando, the New York-based chief equity market strategist at Federated Investors Inc., which oversees $354.9 billion. “We’re starting to put some of the major building blocks into place to resolve the Greece situation. If you can stop the bleeding, that stops the dominoes from falling. That begins to take some of the contagion risk off the table.” The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, lost 5.7 percent to 18.86. The S&P 500 has risen for four days after a six-week slump brought it within half a point of erasing its 2011 gain on June 16 and made it the cheapest in almost a year compared with forecast earnings. Confidence Vote Stocks rose across the globe amid growing investor optimism that today’s vote of confidence in Greek Prime Minister George Papandreou is likely to determine how soon the nation can win international aid to shore up its finances. Benchmark gauges and a measure of homebuilders in S&P indexes rallied even as a report showed that sales of existing U.S. homes fell in May to the lowest level in six months. Purchases of existing homes fell 3.8 percent to a 4.81 million annual pace last month, in line with the 4.8 million median estimate in a Bloomberg News survey of economists, data from the National Association of Realtors showed. The slow pace of recovery should allow the Federal Reserve to delay the central bank’s exit from record stimulus, economists said in a survey. Officials are scheduled to meet in Washington today and tomorrow to determine the course of policy. Fed’s Balance Sheet Seventy-nine percent of 58 economists expect Bernanke to sustain the Fed balance sheet at current levels until October or later, compared with 52 percent who held that view before the Fed’s last policy meeting in April, according to a Bloomberg News survey conducted last week. Ninety percent of those surveyed predict the Fed will wait until the fourth quarter before dropping its pledge to hold interest rates low for an “extended period.” “They want to keep monetary policy as easy as possible,” said Tom Wirth, senior investment officer for Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York. “In Europe, they’ve started to raise interest rates, and that is really hurting their economies.” The Federal Reserve “recognizes that is the wrong medicine to give at this point.” Fitch Ratings said U.S. lawmakers are “very likely” to raise the debt ceiling limit before Aug. 2, even as it reiterated that failure to do so would result in the country being placed on rating watch negative. Rating Watch Negative “The U.S. Treasury is saying that if the debt ceiling is not raised by Aug. 2, then they can’t guarantee that they will remain current on their obligations,” Andrew Colquhoun, head of Fitch’s Asia-Pacific Sovereigns team, said in an interview in Singapore today. “If the debt ceiling has not been raised by then, then we would put the U.S. sovereign ratings on rating watch negative. We think it’s very likely that the debt ceiling will be raised in good time.” Treasury Secretary Timothy F. Geithner has warned that a failure to increase the $14.3 trillion debt ceiling by Aug. 2, the date he projects borrowing authority would be exhausted, may have catastrophic effects on the U.S. economy by sharply raising borrowing costs. Republicans are using the debt-ceiling talks to press for cuts in government spending. Fitch rates U.S. sovereign debt AAA, the highest investment grade. Wells Fargo, the largest U.S. home lender, added 1.9 percent to $27.46. Citigroup rose 3 percent to $39.31. Regulatory Claims JPMorgan Chase & Co. (JPM) pared a gain of as much as 1.9 percent, rising 1.1 percent to $40.91. The only Wall Street bank to remain profitable throughout the financial crisis agreed to pay $153.6 million to resolve U.S. regulatory claims over its role in designing and selling a product linked to risky mortgages as the housing market unraveled in 2007. The Morgan Stanley Cyclical Index of companies most- dependent on economic activity gained 2.5 percent as 29 of its 30 stocks rose. The Dow Jones Transportation Average of 20 stocks increased 1.9 percent. Caterpillar, the world’s largest maker of construction equipment, advanced 3.3 percent to $101.39. Alcoa climbed 4 percent to $15.37. Hewlett-Packard gained 0.9 percent to $35.30. Best Buy rose 2.7 percent to $32.38. The buyback plan replaces the $5.5 billion program announced in 2007, which had $800 million left as of May 28, the Richfield, Minnesota-based company said today in a statement. The quarterly payout will be raised to 16 cents a share. Bed Bath & Beyond Inc. (BBBY) advanced 2.8 percent to $54.06. Deutsche Bank AG said first-quarter earnings at the home furnishings retailer may beat estimates. Deutsche Bank estimated 60 cents a share for first-quarter earnings, which are scheduled to be released tomorrow. Consumer Companies A gauge of consumer companies that sell necessities slid 0.1 percent, the only decline within 10 S&P 500 groups. Walgreen Co. (WAG) slumped 4.2 percent to $43.28. The largest U.S. drugstore chain said it failed to renew a contract worth more than $5 billion in annual sales with drug-benefits manager Express Scripts Inc. (ESRX) after negotiations fell apart. The agreement will end as of Jan. 1. The S&P 500 rebounded after touching its 200-day moving average last week, a sign that the market’s decline from an April peak may be limited, analysts who study charts to make predictions said. The benchmark index for U.S. equities fell to as low as 1,258.07 on June 16, 0.17 point above its average level of 1,257.90 in the previous 200 days, before recouping the loss and ending the day higher. The 200-day moving average “is a pretty significant support level,” as it’s close to the S&P 500’s low for the year in March and to the closing level at the end of 2010, Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati, said in an interview. “There could be some potential buying here,” he said. “We’re encouraged the market held pretty well. Longer term, the uptrend is still in place.” Euro Gains Versus Dollar, Yen After Greece’s Pandreou Wins Confidence Vote The euro rose against the dollar and the yen after Greek Prime Minister George Papandreou won a confidence vote in parliament, taking the Mediterranean nation one step closer to avoiding default on its debt. The shared currency rose after Papandreou received 155 votes. He needed 151 to prevail. The Federal Reservebegan a two-day policy meeting. “The euro will trade higher,” Jessica Hoversen, a New York-based analyst at the futures broker MF Global Holdings Ltd., said before the vote. Greek lawmakers “recognize that the market needs to believe that Greece is going to get that $12 billion tranche and a vote for the government is a vote for the package.” The euro rose against the dollar to $1.4391 at 6:15 p.m. in New York, from $1.4304 yesterday. It earlier touched $1.4423, the strongest level since June 15. The euro gained against the yen to 115.52, from 114.80. The confidence ballot cleared the way for a separate vote on a 78 billion-euro ($112 billion) package of budget cuts and asset sales to ensure the payment of 12 billion euros due in July under last year’s 110 billion-euro bailout from the European Union and the International Monetary Fund. It also was needed for consideration of a second rescue plan. Pleas for Consensus Papandreou called last week for the confidence vote after opposition parties rejected pleas for national consensus and his handling of the crisis led to defections from his party. The dollar weakened earlier before the Federal Open Market Committee issues an interest-rate decision tomorrow. Policy makers will keep the benchmark interest rate at zero to 0.25 percent tomorrow, where it’s been since December 2008, a Bloomberg News survey forecast. Futures show the likelihood policy makers will increase the target rate by March 2012 dropped to 21 percent from 30 percent a month ago. Sales of existing homes in the U.S. decreased in May to the lowest level in six months, an annual pace of 4.81 million, National Association of Realtors data showed today. The report followed data from the New York and Philadelphia Fed Banks last week showing manufacturing in those regions shrank this month. “The slowdown we’ve seen has pushed out the expected Fed tightening,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York. “We’ve had two and a half months of data and the timing of expected Fed tightening is pushed out by 10 months. The market may be extrapolating the softness for a longer period than they have any right to.” Dollar Index The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.4 percent. The Standard & Poor’s 500 Index gained 1.3 percent, and the Thomson Reuters/Jefferies CRB Index of raw materials increased 0.6 percent. Crude oil rose as much as 1.6 percent to $94.74 a barrel in New York before briefly reversing gains. The euro earlier rose versus most major currencies as Greece’s Papandreou sought to secure multiparty support for his government’s austerity measures. He called last week for the confidence vote after opposition parties rejected pleas for national consensus and his handling of the crisis led to defections from his party. Luxembourg’s Jean-Claude Juncker assured investors yesterday that a solution will be found to Greece’s debt crisis. Implied volatility for one-week Euro-U.S. dollar options has slumped 195 basis points to 13 percent over the past three days. It closed at 14.98 percent on June 16, the highest level since May 6. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency. A basis point is 0.01 percentage point. The pound weakened 0.5 percent to 88.73 pence per euro and rose 0.2 percent to $1.6238 after Bank of England Markets Director Paul Fisher said further bond purchases to stimulate the economy are possible.

Oil Gains a Second Day as Euro Crisis Eases, U.S. Crude Supplies Seen Down Oil advanced for a second day in New York as concern eased that Greece will default on its debt and investors bet a report will show U.S. crude stockpiles dropped for a third week. Futures climbed as much as 1.6 percent after Luxembourg’s Prime Minister Jean-Claude Juncker said his Greek counterpart assured him the government would do everything to ensure financial aid. Mirae Asset Securities Ltd. raised its Brent price forecasts by 15 percent as fighting in Libya continued to disrupt supplies. An Energy Department report tomorrow may show U.S. crude inventories fell for a third week, according to the median of 12 analyst estimates in a Bloomberg News survey. “The markets right now are under the spell of supply insecurity on the one side, and sentiment and overall macroeconomic indicators on the other,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. “The rebound we’re seeing today is moderate considering the recent slide.” Oil for July delivery rose as much as $1.48 to $94.74 a barrel on the New York Mercantile Exchange and was at $94.53 at 1:35 p.m. London time. The contract expires today. The more actively traded August future gained $1.25 to $94.88. Crude in New York, up 21 percent in the past year, has dropped 17 percent from this year’s settlement high of $113.93, reached on April 29. A 20 percent decline is one measure used to define a “bear market.” Technical Indicators Brent oil for August delivery was at $112.49 a barrel, up 80 cents, on the London-based ICE Futures Europe exchange. The contract yesterday fell $1.52, or 1.3 percent, to $111.69. Prices have advanced 43 percent the past year. Oil yesterday fell below its lower Bollinger Band, a technical signal that prices may have declined too far. The contract also slid below its 200-day moving average of $92.30 a barrel, a level that can attract buyers, supporting prices. “There’s a little bit of optimism leading back into the market and the chances are that the Greece concerns will probably be solved some way,” said Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney, who predicted prices will average $100 a barrel this year. “We feel oil is due for a bit of a bounce.” Greek Confidence Vote Greece’s cabinet faces a confidence vote in parliament today. Prime Minister George Papandreou is seeking the “widest possible” consensus for a medium-term budget plan, he told reporters yesterday after meeting European Commission President Jose Barroso in Brussels. European Union leaders have insisted he gain multi-party support for austerity measures that are a condition for the aid needed to avoid default as soon as next month. Mirae Asset Securities raised its average Brent crude forecasts for 2011, 2012 and 2013 by 15 percent to $115 a barrel on the “sustained loss” of Libyan oil supplies, according to a report e-mailed today. Production in the North African country has been cut by almost 90 percent since fighting broke out between rebel forces and troops loyal to leader Muammar Qaddafi. U.S. inventories dropped 1.63 million barrels, or 0.4 percent, to 363.9 million in the seven days ended June 17, according to the analysts surveyed before the Energy Department’s report tomorrow. Nine of the respondents forecast a decline, two projected a gain and one said there was no change. The industry-funded American Petroleum Institute will report its own data today. The third weekly drop in U.S. crude supplies would be the longest stretch of declines this year, reflecting an increase in gasoline output to the highest level in nine months. Refineries probably operated at 86.6 percent of capacity last week, up 0.5 percentage point from the prior week, the survey showed.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

BDO UNIBANK INC.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Morning Brief: 21 June 2011

May BOP surplus down 44% year on year But 5-month figure was 78% higher than in ’10 By: Michelle V. Remo Philippine Daily Inquirer The country’s balance of payments (BOP) surplus in May fell from that of the same month last year as foreign currency outflows exceeded the amount coming in. The Bangko Sentral ng Pilipinas said that the government’s settlement of its maturing obligations led to a decline in the BOP surplus. The central bank reported that the country’s BOP surplus amounted to $217 million in May, dropping by 44 percent from the $388 million registered a year ago. Despite the decline in the BOP surplus last month, the central bank said that for the first five months of 2011, the surplus was still higher than that of the same period last year. From January to May, the BOP stood at $4.8 billion—78 percent higher than the $2.7 billion seen in the same period a year ago. “This [January to May surplus] could be traced to strong foreign exchange inflows from investments, exports and remittances,” BSP Governor Amando Tetangco Jr. told reporters. The surplus was driven by inflows of foreign currencies arising from the income of the BSP from its investments abroad, and loans secured by the government from foreign creditors. Still, the outflows were higher. The government and the BSP during the period paid off liabilities denominated in foreign currencies, while state-owned Power Sector Assets and Liabilities Management Corp. (PSALM) decided to withdraw its deposit from the central bank to meet its expenditure requirements. BOP, which reflects the country’s commercial transactions with the rest of the world, is the difference between the amount of foreign currencies coming into the country and that flowing out. A surplus in the BOP tends to beef up the country’s overall reserve of foreign currencies, also called the gross international reserves. The GIR reflects an economy’s capacity to pay for its imports, settle debts with foreign creditors, and engage in other commercial transactions with parties abroad. Earlier, the central bank reported that the country’s GIR, given a boost by the surplus in the BOP, amounted to a record $68.9 billion as of end-May this year. Apart from the income of the BSP from its investments abroad and loans obtained from foreign creditors, earnings from exports, remittances and investments in the business process outsourcing sector are the usual contributors to the country’s GIR. The central bank claims that the country’s GIR remains at a comfortable level, or enough to meet any short-term requirements of the country. The BSP credits the country’s foreign currency holdings for its improved credit standing recently. Last week, Moody’s Investors Service upgraded the country’s credit rating from three to two notches below investment grade. This followed a similar ratings action by Standard & Poor’s last November.

U.S. Stocks Gain as Luxembourg’s Juncker Says Greek Solution Will Be Found U.S. stocks rallied, sending the Standard & Poor’s 500 Index up for a third straight day, as Luxembourg’s Jean-Claude Juncker assured investors that a solution will be found to Greece’s debt crisis. Caterpillar Inc. (CAT), the world’s biggest maker of construction equipment, climbed 2.3 percent as Raymond James & Associates raised its rating. Biogen Idec Inc. (BIIB) jumped 4.1 percent after ISI Group Inc. recommended buying shares of the largest maker of multiple sclerosis medicines. Wal-Mart Stores Inc. (WMT) increased 0.4 percent after the U.S. Supreme Court rejected an effort to sue the world’s largest retailer for discrimination. The S&P 500, which has declined for six of the past seven weeks, advanced 0.5 percent to 1,278.36 at 4 p.m. in New York. The Dow Jones Industrial Average gained 76.02 points, or 0.6 percent, to 12,080.38, also rising for a third straight day. “It’s critical that we hold in here,” said Bruce McCain, who helps oversee $22 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland. “There’s anxiety about the European debt crisis. If they can kick the can down the road, there will be more upside potential than downside risk. The market is oversold.” The S&P 500 snapped a six-week slump on June 17, preventing the longest decline since March 2001. The gauge retreated 6.3 percent from this year’s high at the end of April amid weaker- than-estimated economic data and concern about Europe’s debt crisis. The index is still up 1.7 percent in 2011 on government stimulus measures and better-than-expected earnings. U.S. 10-Year Yields Rise From Almost 2011 Low as Concern Eases on Greece Treasury 10-year yields rose from almost the lowest level this year after comments from European and International Monetary Fund officials eased concern Greece’s debt crisis is worsening, reducing U.S. debt’s refuge appeal. U.S. two-year yields were little changed after falling for the past 10 weeks, the longest rally in a quarter-century. Luxembourg’s Jean-Claude Juncker, who leads the group of euro- area finance ministers, said Greek Prime Minister George Papandreou assured him the government would do everything necessary to ensure delivery of financial aid from the European Union and IMF. “The market anticipates that Papandreou will gain the support to do that,” said Chris Ahrens, head U.S. rates strategist in Stamford,Connecticut, at UBS AG, one of the 20 primary dealers that trade with the Federal Reserve. “The market is focused like a laser on events in Greece. The big event is still in the foreground.” Ten-year yields increased one basis point, or 0.01 percentage point, to 2.96 percent at 5:20 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 3.125 percent note maturing in May 2021 fell 1/8, or $1.25 per $1,000 face amount, to 101 13/32. The yield, which earlier fell six basis points to 2.89 percent, touched its 2011 low of 2.88 percent on June 16. It has lost 33 basis points since the start of the year. Two-year note yields were little changed at 0.37 percent after earlier rising to 0.39 percent. They reached a low for the year of 0.34 percent on June 16.

Crude Oil Futures Increase in New York as Juncker Eases Greek Debt Concern Crude oil rose for a second day in New York after Luxembourg’s prime minister, Jean-Claude Juncker, assured investors a solution will be found to Greece’s debt crisis. Futures climbed 0.3 percent today, after gaining 0.3 percent yesterday. Juncker said Greek Prime Minister George Papandreou had assured him the government would do everything to ensure financial aid. He also said Italy was not in danger from the euro area’s debt crisis. Prices slid 2 percent before Juncker’s comments on concern Greece’s debt crisis would weaken the global economy and curb fuel demand. Crude oil for July delivery rose as much as 28 cents to $93.54 a barrel in electronic trading on the New York Mercantile Exchange and was at $93.43 at 8:10 a.m. Sydney time. The contract yesterday settled at $93.26, after earlier touching $91.14, the lowest intraday level since Feb. 22. Futures have increased 20 percent the past year. Oil has dropped almost 18 percent from the 2011 settlement high of $113.93 on April 29. A 20 percent decline is typically considered to be an indicator of a bear market. The July contract expires today. August futures advanced 16 cents, or 0.2 percent, to $93.79 after yesterday climbing 0.3 percent. Brent crude oil for August delivery fell $1.52, or 1.3 percent, to $111.69 a barrel yesterday on the London-based ICE Futures Europe exchange.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

BDO UNIBANK INC.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Philippine Markets: 17 June 2011

17 June 2011

USD/PhP: 43.66 + 0.135 PSEi: 4153.11 - 19.97
USD/JPY: 80.46 PFINC: 912.43 - 21.65
EUR/USD: 1.4165 BDO: 51.80 - 3.15
GBP/USD: 1.6118 BPI: 53.95 - 1.55
PDSTF3M: 3.1804 MBT: 69.50 - 0.05
Prices as of 4:00pm Source: Bloomberg, Reuters


Philippine Interest Rate Outlook

Secondary market rates moved up by an average of 7 basis points week-on-week as short-term rates continued to move up in anticipation that monetary authorities will continue to hike its benchmark rates at its policy meeting scheduled on 16 June . The BSP unexpectedly kept the benchmark rate to 4.50 percent but increased reserve requirements from 19% to 20%. It aimed to siphon excess liquidity in the market to prevent further inflationary pressures. Their recent move reinforces its move to stay ahead of inflation.

Continue to expect interest rates to move sideways with upward bias next week.

Philippine Equities Outlook

Local shares slumped 1.60 percent week-on-week to 4153.11 as fear trades triggered sell-off in global equity markets due to uncertainty in US economic health and escalating Euro debt concerns. Expect continued weakness and heightened volatility in the market as locals track US market movements.

Chartwise, the week’s close at 4153.11 continues to support the emerging down trend forming in the charts. A break below 4150 levels will put the 4000-4100 levels at play. Only a strong move above the 4250 will put the bulls back into play.

Philippine Peso Outlook

Local currency fell 0.88 percent week-on-week to 43.66 as US dollar strengthened against major currencies particularly the Euro as Greek debt concerns are worrying investors and traders worldwide. Weakness in global equity markets also prompted buying of US dollars as safe haven

Chartwise, the week's close at 43.66 signals a break of an important resistance at 43.60. This suggests the market has the momentum to try the 44.00-44.50 levels in the next few weeks. Only a move below the 43.00 levels will negate any moves above the 44.00 levels.


BDO UNIBANK, INC.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001