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Philippine Markets: 28 January 2011


28 January 2011

USD/PhP: 44.10 PSEi: 3970.34 - 20.15
USD/JPY: 82.71 PFINC: 898.39 + 1.92
EUR/USD: 1.3705 BDO: 52.40 - 0.65
GBP/USD: 1.5891 BPI: 54.20 - 0.30
PDSTF3M: 3.3096 MBT: 66.60 + 1.30
Prices as of 12:00pm Source: Bloomberg, Reuters


Philippine Interest Rate Outlook

Secondary market rates were lower this week by an average of 76 basis points across the curve as correction sets in the market following expecations that BSP will not raise rates in the near-term. Most likely they will move as early as the second quarter. Other factors that forced a correction was the BTr's decision to reject rates at its latest auction, sending a clear signal to the market that low rates are still here supported by the strong liquidity and assurances from government officials that inflation will remain tame.

This correction has pushed the 3M PDST-F rate from a high of 4.1769 to the week's close of 3.3096, lowery by 82 bps week-on-week, while the 5Y PDST-F also behaved similarly to the 3M PDST-F falling from a high of 6.5269 to the week's close of 5.6058

Continue to expect sideways to upward movements in the week ahead of the January 2011 inflation figures , with the 3M PDST-F ranging between 3.00-4.00 percent levels. While the 5Y PDST-F rate is seen to range between the 5.50 - 6.25 percent.

Philippine Equities Outlook

Local stocks rose 0.49 percent week-on-week to 3970.34 for the first time in three weeks on bargain hunting activities. However, risk aversion resurfaced during the end of the week, reversing most of the week's gain due to lack of market moving news.

Chartwsie, the week's close at 3970.34 implies that the current rally is a mere pullback (as mentioned in the previous week, which may be limited to the 4,000-4,050 levels), a rally above the 4,150 level is needed to counter the current bear sentiment. Failure to see this in the week ahead could signal a resumption of the corrective trend testing the 3,800 -3,850 levels in the near-term.


Philippine Peso Outlook

As of 12:00pm, the local currency rose against the dollar compared to the previous week as the US dollar continued to slide against the major currencies, causing the greeback to perform weaker against emerging market currencies.

Chartwise, this week's movements is viewed as a mere correction of the emerging strong dollar trend against the peso, expect the 43.80-44.00 levels to hold in the week ahead, with an expectation to test the 44.50 in the near-term.. Only a break below the 43.80 levels will entertain further peso strength towards the 43.00 -43.50 levels.



BDO UNIBANK INC.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher

(632) 858-3001

Morning Brief: 28 January 2011


Fed gives BSP room on rates

THE US FEDERAL RESERVE’S decision to maintain its policy rate at near zero supports the Bangko Sentral ng Pilipinas’ (BSP) current stance of keeping its own rates at a record low, the central bank chief yesterday said.

"The Fed move relieves some pressure off the consensus that has been building up that the US economy is at a pace of recovery which may lead the Fed to change its policy stance, and the effect of such development on inflation expectations and portfolio rebalancing out of EMs (emerging markets)," BSP Governor Amando M. Tetangco, Jr. said in a text message yesterday.

"This is broadly in line with our own assessments and supports our current policy stance."

In its final 2010 policy meeting last December 29, the Monetary Board decided to keep overnight borrowing and lending rates at 4% and 6%, respectively, as it noted that the inflation outlook remained favorable.

The rates have not been adjusted since July 2009.

The Federal Open Market Committee (FOMC), which decides on US monetary policy, kept its benchmark interest rate at 0-0.25% following a two-day meeting that ended Wednesday, saying the economy’s performance supported the policy of keeping rates low.

"Information received since the FOMC met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions," it said in a statement.

The FOMC also said it would continue with a plan -- announced last November -- to purchase $600 billion worth of long-term US Treasury securities until the second quarter of the year.

Impact

BSP Deputy Governor Diwa C. Guinigundo said that while the Fed decision could boost global economic momentum, it could also fuel more capital inflows to emerging markets such as the Philippines.

"Short-term impact is to increase risk aversion and induce more FX (foreign exchange) inflows to emerging markets including the Philippines," Mr. Guinigundo said in a text message.

"Long-term effect is expected to be more positive. Growth recovery in the US could be boosted, financial markets normalize, such that global prospects could be brighter," he said.

"The risk, of course, is the fiscal costs associated with further quantitative easing."

Watchful

Mr. Tetangco said that while current monetary policy remained appropriate, the BSP would continue to be watchful of external developments.

"[W]e continue to be mindful of changes in growth dynamics of our major trading partners, including the US and China, to see if any changes to our own policy stance are necessary," he said.

The Monetary Board will next meet on February 10 to discuss policy.

Inflation averaged 3.8% last year, hitting the central bank’s forecast and falling within the 3.5-5.5% full-year target.For 2011, the BSP has an inflation forecast of 3.6% and a full-year target of 3-5%.

Inflation data for January will be released on February 4.

The central bank has said inflation for the first month of the year could fall within a 2.7-3.6% range. -- reports from L. D. Desiderio and Reuters


SLEx sets new round of toll hikes

MANILA, Philippines—Toll rates at the South Luzon Expressway (SLEx) are set to go up again next week as part of the scheme to raise them in increments until the government-approved toll increase is met.

South Luzon Tollways Corp. (SLTC) said the upward rate adjustment of about 4.5 percent would take effect one minute past midnight on Feb. 1.

For class 1 vehicles or private cars, the toll will go up to P2.80 per kilometer from the current P2.68. This means motorists traveling the entire Alabang to Calamba length of the SLEx would have to pay P79 from the current P76.

Class 2 or public utility vehicles, particularly buses, would have to pay P159 from the current P152. Trucks, which are class 3 vehicles, would be charged P238 from P228 today.

An additional P22, P43 and P65, respectively, would be charged class 1, 2 and 3 vehicles that take the eight-km link between the SLEx and the Southern Tagalog Arterial Road (STAR).

SLTC president Isaac David said the new rates would still be an average of 7.58 percent less the rates approved by the Toll Regulatory Board (TRB) late last year.

The TRB had approved a 300-percent hike in SLEx toll rates to allow the SLTC, which is a subsidiary of Malaysia’s MTD Capital Berhad, to recover the P14 billion it had spent so far to develop and modernize the roadway.

SLTC, however, decided to give motorists a break at the start of the year by raising the rates by only 250 percent.

But the company said it would have to gradually raise the rates every month until April to bring the tolls to the approved level.

SLTC was originally set to raise its rates in July last year, but was stopped by several court orders and foot-dragging by the regulator.

SLTC, which is co-owned by the government through Philippine National Construction Corp., holds the right to manage and operate the SLEx up to 2036.

The toll rates at the SLEx before the 300-percent increase was approved were P22 for class 1 vehicles from Alabang to Calamba, P43 for class 2 vehicles and P65 for class 3 vehicles.


U.S. Stocks Advance on Earnings Reports, Home-Sale Data; Qualcomm Climbs

U.S. stocks rose, with the Standard & Poor’s 500 Index gaining a fifth day, as home sales and Qualcomm Inc.’s forecast beat projections, offsetting Japan’s credit downgrade and higher-than-estimated jobless claims.

Qualcomm rallied 5.9 percent as the biggest maker of mobile-phone chips benefited from more sales of devices that browse the Internet. An index of car companies in the S&P 500 advanced 2 percent after online researcher Edmunds.com forecast a 17.3 percent jump in the industry’s new sales in January. Netflix Inc. surged 15 percent as profit topped projections. Microsoft Corp. increased 0.3 percent after its quarterly results were released before exchanges closed.

The S&P 500 rose 0.2 percent to 1,299.54 at 4 p.m. in New York. The index has gained 1.5 percent over its five-day advance. The Dow Jones Industrial Average added 4.39 points, or less than 0.1 percent, to 11,989.83.


U.S. Bill Rates Drop Most in Month as Treasury Cuts Borrowing Plan for Fed

Rates on U.S. one- and three-month bills fell the most in a month after the Treasury Department said it will reduce borrowing on behalf of the Federal Reserve as the U.S. approaches a debt-borrowing limit.

Treasury notes and bonds gained after the U.S. sold $29 billion of seven-year notes at a yield lower than the one forecast by the primary dealers that are required to bid on the securities. The gap between U.S. 2- and 30-year yields had widened to almost a record, indicating investors are demanding greater compensation for the risk of rising inflation.

“The Treasury’s actions have given the bill market a bid, as there will be somewhat less issuance in the front end,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., one of 18 primary dealers that trade with the Fed. “We are still seeing a steeper curve, and the steepness should stay with us. Investors have been shunning longer-dated debt in favor of the short as inflation concerns have begun to crop up.”

Rates on one-month bills dropped as much as three basis points, the most on an intraday basis since Dec. 20, to 0.11 percent. They traded at 0.13 percent at 5:05 p.m. in New York, down two basis points, according to BGCantor Market Data. Three- month bill rates fell as much as two basis points, the most since Dec. 29, to 0.14 percent. One basis point equals 0.01 percentage point.

The yield difference, or spread, between 2- and 30-year Treasuries widened to as much as 4.016 percentage points before trading at 3.991 percentage points. It reached 4.018 percentage points on Jan. 20, the steepest slope to the so-called yield curve since Bloomberg records on the data began in 1977. It was 2.995 percentage points in August.



Oil Falls to Eight-Week Low in N.Y. After Jobless Claims Rise

Crude oil fell to an eight-week low in New York, and slid to a record discount versus London’s Brent, as a bigger-than-forecast gain in U.S. jobless claims bolstered concern that the economy will be slow to recover.

Futures dropped 1.9 percent after Labor Department figures showed applications for jobless benefits rose 51,000 to 454,000 last week. Orders for U.S. durable goods decreased in December.

“The market has just collapsed,” said Stephen Schork, president of Schork Group Inc., a consulting company in Villanova, Pennsylvania. “The economic numbers today were horrendous. We’ve had one bearish headline after another since last week.”

Crude oil for March delivery tumbled $1.69 to $85.64 a barrel on the New York Mercantile Exchange, the lowest settlement price since Nov. 30. Futures are up 16 percent from a year ago.




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

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher

(632) 858-3001
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