Morning Brief: 3 May 2011

91-day T-bill rate hits new low of 0.568% Yields of 6-month, 1-year securities inch up By Ronnel Domingo Philippine Daily Inquirer MANILA, Philippines—The yield on the 91-day treasury bills fell to a new historic low of 0.568 percent as Monday’s government auction got mixed results. This was 11.2 basis points lower than the 0.68 percent set in the previous auction two weeks ago. On the other hand, interest rates on the 182-day bills rose 5.2 basis points to an average 0.95 percent while those on the 364-day securities increased 6.4 basis points to an average 2.032 percent. Rates for the benchmark bills and the 182-day paper were lower than those for done-deals in the secondary market, which settled at 0.725 percent and one percent, respectively. However, the primary market average for the 364-day bills was higher than the 2-percent yield set in the secondary market. National Treasurer Roberto B. Tan said Monday’s rates were a result of “a confluence of news” that were favorable to maintaining the current monetary policy. One such news was about the “US Federal Reserve’s neutral stance, for the moment, about their policy rates, which influence the decision of other central monetary authorities” like the Bangko Sentral ng Pilipinas, Tan said. The BSP was the last central bank in the region to increase its policy rates from their financial crisis levels, recently cranking up by 25 basis points its overnight borrowing rate to 4.25 percent and its overnight lending rate to 6.25 percent. Tan also cited recent positive reports on the government’s first-quarter fiscal position that he said indicated that Malacañang’s economic program was turning out to be effective. Last week, the Bureau of the Treasury reported that the deficit for January-March settled at P26.2 billion, or less than a quarter of the planned P112 billion. Tan added that Monday’s auction was influenced by inflation figures remaining within the target range that the BSP adopted. As of the first quarter, the inflation rate averaged 4.1 percent, well within the BSP’s goal of between 3 and 5 percent. On Monday, investors brought forward a total of P21.82 billion worth of bids as against the P9 billion on offer. Tenders for the three-month bills reached P6.43 billion, or more than four times the P1.5-billion offering. Bids for the six-month bills totaled P6.65 billion, or almost twice the P3.5 billion offered, while those for the year-long securities reached P8.74 billion, more than twice the P4 billion being sold. The Treasury raised a total of P9.6 billion from all three maturities, exceeding the original offer that totaled P9 billion. Bidding rules allow the Treasury to double the amount it would award for non-competitive bids if, for a given tenor, such bids accounted for less than a quarter of all tenders. Non-competitive bidders do not indicate a rate in their tenders and they will get the resulting average rate when their bids are accepted. In Monday’s case, non-competitive bids for the 91-day bills were less than a quarter of total tenders for each tenor, which allowed an additional award of P600 million.

U.S. Stocks Fall as Valuations Overshadow Bin Laden Death U.S. stocks retreated, pulling the Standard & Poor’s 500 Index down from the highest level since June 2008, as a slump in commodity producers overshadowed optimism spurred by the death of Osama bin Laden. Energy shares had the biggest decline in the S&P 500 within 10 industries as crude oil prices fell. Applied Materials Inc. (AMAT) slumped 3.4 percent after JPMorgan Chase & Co. cut its rating for the world’s largest producer of chip-making equipment. Cephalon Inc. (CEPH)climbed 4 percent after Teva Pharmaceutical Industries Ltd. (TEVA) agreed to buy the company for $6.8 billion. International Coal Group Inc. (ICO) soared 31 percent after Arch Coal Inc. (ACI) agreed to purchase it for $3.4 billion. The S&P 500 slipped 0.2 percent to 1,361.22 at 4 p.m. in New York, erasing an earlier 0.5 percent advance. The Dow Jones Industrial Average lost 3.18 points, or less than 0.1 percent, to 12,807.36 after climbing as much as 65 points. U.S. 10-Year Yields at Almost 6-Week Lows on Fed Buys, Manufacturing Slip Treasury yields traded at almost six- week lows as a report showed U.S. manufacturing grew in April at a slower pace than the previous month, reinforcing concern the economic recovery will be gradual. The U.S. 10-year note yield, which declined in April by the most since August, touched lows as the Federal Reserve purchased $7.24 billion of Treasuries due from May 2018 to February 2021 today as part of its debt-buying program. Speculation about terrorist attacks after Osama bin Laden died in a firefight in Pakistan also boosted demand for Treasuries after yields rose earlier on the news. The dollar dropped to a 16-month low against the euro. “The weak economy is helping the bid,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “With so much money sloshing around with the weak dollar, people are putting it in Treasuries. If we took out the head of al-Qaeda, the assumption is that there may be reprisals and you want to be prepared for that.” Yields on 10-year notes fell one basis point, or 0.01 percentage point, to 3.28 percent at 5:11 p.m. in New York, according to Bloomberg Bond Trader prices, after rising as much as three basis points. The 3.625 percent note due in February 2021 rose 3/32, or 94 cents per $1,000 face amount, to 102 28/32.

Oil Declines First Day in Four on Bin Laden Death, Manufacturing Reports Crude oil dropped for the first time in four days after al-Qaeda leader Osama bin Laden was killed in Pakistan and a report showed manufacturing cooled in April. Oil declined 0.4 percent after President Barack Obama said U.S. forces shot bin Laden yesterday. The Institute for Supply Management’s manufacturing index declined last month and a Chinese manufacturing measure dropped more than forecast. “The market is taking some of the risk premium out of it,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “The manufacturing data came out and oil and gasoline have pulled back a little bit. Certainly the uptrend is slowing.” Oil for June delivery fell 41 cents to settle at $113.52 a barrel on the New York Mercantile Exchange. The contract rose 6.8 percent last month and settled at $113.93 on April 29, the highest level since Sept. 22, 2008.

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: 29 April 2011

29 April 2011

USD/PhP: 42.80 - 0.125 PSEi: 4319.51 + 40.68
USD/JPY: 81.56 PFINC: 955.89 + 6.40
EUR/USD: 1.4834 BDO: 54.30 + 0.25
GBP/USD: 1.6664 BPI: 58.80 + 0.95
PDSTF3M: 0.7842 MBT: 68.65 + 0.10
Prices as of 4:00pm Source: Bloomberg, Reuters

Philippine Interest Rate Outlook

Secondary market rates continued to head south boosted by the demand for short-term dated goverment securites. The ample market liquidity, perception that inflation is well under control and news that the 1Q budget short-fall of the goverment is well below its target continue to support the view that rates will remain on the low side. Expect interest rates to remain near the lows.

Philippine Equities Outlook

Local shares rose 1.05 percent week-on-week to 4319.51 as investor sentiment was boosted by the rise in Wall Street on positve 1Q corporate results.

Chartwise, the week's close at 4319.5 continues to support a near-term rise towards the 4,400 levels. Failure to clear the said level could call for a retest of the 4,200 levels.

Philippine Peso Outlook

The local currency rose 1.10 percent week-on-week to 42.80, as the greenback weakened further this week following S&P outlook downgrade on the USA to negative. Global investors continue shy away from the US Dollar denominated assets.

Chartwise, with the breach of 43.00 key support, expect further appreciation towards 42.50 levels.

BDO UNIBANK, INC.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Morning Brief: 28 April 2011

Q1 budget deficit well under ceiling THE FIRST-QUARTER budget deficit came in well under the programmed ceiling, the government yesterday reported, on the back of strong tax collections and a reduction in spending. An P18.131-billion shortfall in March brought the tally for the first three months of the year to P26.197 billion, comfortably below the projected deficit of P111.986 billion. It was also significantly lower than the P134.179-billion fiscal gap recorded in the same period last year. Revenues totalled P323.078 billion, up 22% from a year earlier and surpassing the three-month goal of P319.271 billion. The primary boost came from the Bureau of Internal Revenue (BIR) -- responsible for over two-thirds of state tax collections -- which exceeded its P197-billion target by collecting P199.549 billion. Finance Secretary Cesar V. Purisima, in a statement, said the BIR had seen gains from "intensive tax campaign efforts." The Bureau of Customs (BoC), however, was hampered by a stronger peso and committed tariff rates reductions. The bureau -- the second-biggest revenue earner -- netted P62.618 billion in the first quarter, short of its P63.388-billion goal, even though collections for the period were higher than last year’s P60.581 billion. The Bureau of the Treasury put in P38.258 billion, more than doubling last year’s P13.822 billion. The three-month tally, however, was also short of the agency’s P40.522-billion goal. On the expenditure side, meanwhile, January to March disbursements of P349.275 billion were nearly P82 billion below the programmed P431.257 billion. March spending of P125.283 billion alone was down 22% from a year earlier. With the government having announced that it would be frontloading spending in a bid to boost the economy, Budget Secretary Florencio B. Abad said, "We are now looking deeper into the cause of slower disbursements ... So far, indications point to more caution exercised by agencies in planning and spending funds allotted to them." Agencies are also reviewing their projects and programs in an attempt to bring down costs and create savings, he claimed. "For example, the Department of Public Works and Highways has put on hold many of its infrastructure projects until they have finished their reassessment of road conditions and review of infrastructure cost assumptions," Mr. Abad said. "Per [Public Works] Secretary [Rogelio L. Singson], initial results show that government could save ...P6-7 billion that can be used for the rehabilitation of more roads and bridges," he added. University of the Philippines economist and former Budget secretary Benjamin E. Diokno slammed this as a "very poor excuse." "The review should have been done and completed during the first six months of the Aquino presidency... The government has a lot of catching up to do," he said in an e-mail to BusinessWorld. While part of the expenditure reduction can be traced to lower interest payments -- P90.720 billion compared to the programmed P101.247 billion -- Mr. Diokno said most of the cuts were in spending that would have benefited the economy. "This reflects a very slow moving bureaucracy if we believe DBM’s (Department of Budget and Management) press statement that it has already frontloaded the bulk of the 2011 budget," he said. The Budget department recently announced that it had released almost half of the P1.645-trillion national budget for 2011 during the first quarter. The government wants to keep this year’s budget deficit to 3.2% of gross domestic product (GDP), or P290 billion, from last year’s record of P314 billion or 3.7% of GDP. Economist Euben Paracuelles at Nomura in Singapore said the first quarter result had placed the government "on track to beating the full-year forecast." "My forecast is still 3% of GDP," Mr. Paracuelles said. Radhika Rao at Forecast Pte in Singapore, meanwhile, said: "taken in isolation, [the] marked improvement in Q1 deficit is commendable... Markets will take solace from the narrowing deficit picture, though below-target spending still remains a source of concern." -- D. C. J. Jiao with a report from Reuters Globe hits PLDT-Digitel deal GLOBE TELECOM, INC. wants the government to intervene in Philippine Long Distance Telephone Co.’s (PLDT) planned purchase of rival Digital Telecommunications Philippines, Inc. (Digitel), claiming the possible return of a monopoly. The National Telecommunications Commission (NTC), Globe counsel Rodolfo A. Salalima said in an April 26 letter to the agency, "cannot and must not shirk from its legal obligation to... regulate, if not forestall, the deal’s grave implications and impact on free competition and, in the long term, the common good." An NTC official said the planned purchase -- announced last month and targeted for completion by end-June -- was being reviewed following instructions from Malacañang. A PLDT executive, meanwhile, called Globe’s appeal "regulatory blackmail." The questioned P69.2-billion deal involves PLDT’s acquisition of a 51.55% stake in Digitel -- which owns the Sun Cellular brand -- from JG Summit Holdings, which in return will get a 12.8% stake in the dominant telco. The Globe letter, copies of which were distributed to reporters yesterday during the firm’s demonstration of a planned service, states that the NTC needs to act given its mandate to protect consumers and level the playing field under Republic Act (RA) 7925 or the Public Telecommunications Policy Act. The law, Globe said, was specifically passed in 1995 to end a monopoly enjoyed by PLDT. It noted that the PLDT-Digitel deal, if consummated, would give PLDT 70% of the cellular mobile market, leaving Globe with 30%. The frequency ratio of 1:3.5 is also in favor of PLDT, it added. The firm urged the enactment of antitrust laws and the issuance of NTC policies, among them a circular defining any entity with a minimum 50% share of the market as a "monopoly carrier." It called for aggressive enforcement of interconnection between telcos and also the implementation of a policy on "IP peering" -- interconnection between two internet service providers -- that would allow for a better Web experience for consumers. "The present PLDT/Digitel deal...strikes at the very core of free competition and, if not preempted or otherwise regulated, will...bring back this country to the dark ages of the old monopoly pre-RA 7925," Globe said. Sought for comment, NTC Commissioner Gamaliel A. Cordoba told BusinessWorld, "The deal will need an approval from NTC, and we are studying the deal on how we can prevent it from adversely affecting consumers." "President [Benigno S. C. Aquino III] has already given us instructions to study the whole deal in cooperation with economic managers and the [Justice department]." Public hearings, Mr. Cordoba added, will be scheduled once PLDT and Digitel submit details of the deal. Ray C. Espinosa, head of regulatory affairs and policy at PLDT, said in a statement that "these issues are being raised by Globe with much thunder and lightning in order to gain leverage and exact concessions from PLDT...Globe wants to use the NTC to deliver these concessions on a silver platter." "The monopoly issue being raised by Globe is a ruse. It is meant to weaken the resolve of the NTC to approve a deal that will bring enormous benefits to the public in terms of better service and accelerated high-speed broadband Internet service throughout the country," he added. Mr. Espinosa also claimed that Globe was also involved in "institutionalized combinations of restraint of trade," noting exclusive arrangements with property development projects. Globe shares closed P5 higher at P880 per yesterday, while PLDT’s ended the day P10 up at P2,466 apiece. Shares in Digitel were unchanged from Tuesday at P1.56 per share. Mediaquest Holdings, Inc., a unit of the Beneficial Trust Fund of PLDT, has a minority stake in BusinessWorld. -- K. A. Martin

U.S. Stocks Rally as Federal Reserve Signals Low Interest Rates; GE Gains U.S. stocks rose, giving the Standard & Poor’s 500 Index the fifth gain in six days, as the Federal Reserve renewed its pledge to stimulate growth with low rates and said a pickup in inflation is likely temporary. General Electric Co. (GE) added 2.7 percent after saying it wants to boost its dividend. Moody’s Corp. (MCO), whose founder John Moody created credit ratings more than a century ago, climbed 6.7 percent as profit beat estimates by 25 percent. Amazon.com Inc. (AMZN) gained 7.9 percent as the world’s largest online retailer reported sales that topped predictions and Deutsche Bank AG increased its share-price estimate to $215. The S&P 500 added 0.6 percent to 1,355.66 at 4 p.m. in New York. The Dow Jones Industrial Average gained 95.59 points, or 0.8 percent, to 12,690.96. The Russell 2000 Index of small companies rose 0.6 percent to 858.31, a record. The Fed left its benchmark interest rate in a range of zero to 0.25 percent and retained a pledge in place since March 2009 to keep it “exceptionally low” for an “extended period.” U.S. 30-Year Bond Falls 1st Time in 4 Days as Fed Ups Inflation Forecast Treasuries fell, pushing 30-year bonds down for the first time in four days, as Federal Reserve Chairman Ben S. Bernanke said the U.S. economy is in a moderate recovery and policy makers raised their inflation estimate. Yields on the long bond rose the most in a week as Bernanke, in his first press briefing after a Fed policy meeting, wouldn’t predict when the central bank will start to tighten monetary policy. The central bank also lowered its forecast for economic growth, while Bernanke said inflation is likely to be “transitory.” The U.S. sold $35 billion in five- year debt in the second of three note auctions this week. “Bernanke didn’t back down on the idea that rates would stay low for an extended period and the Fed will err on the side of inflation, which is a negative for longer-end Treasuries,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management inMilwaukee. “The cost to that view may be more inflation down the road.” Thirty-year yields climbed six basis points, or 0.06 percentage point, to 4.45 percent at 5:10 p.m. in New York, according to Bloomberg Bond Trader prices. They rose as much as seven basis points, the biggest intraday jump since April 18. The price of the 4.75 percent security due in February 2041 slid 1 2/32, or $10.63 per $1,000 face amount, to 104 7/8. Ten-year note yields rose five basis points to 3.36 percent. Two-year note yields gained four basis points to 0.64 percent and touched 0.70 percent, the highest since April 15.

Oil Rises a Second Day After U.S. Fuel Stockpiles Fall More Than Forecast Oil climbed for a second day in New York after a government report showed gasoline stockpiles in the U.S. declined more than analysts estimated to the lowest since August 2009. Futures advanced from the highest settlement in more than two weeks after the Energy Department said gasoline inventories fell 2.51 million barrels to 205.6 million, declining for the 10th week. Supplies were projected to drop 1 million barrels last week, according to analysts surveyed by Bloomberg News. “Gasoline supplies are definitely on the light side,” said Kyle Cooper, director of research for IAF Advisors in Houston. “With gasoline supplies falling and prices climbing, refiners can pay more for oil. They are going to pay more to take delivery of extra barrels of crude because they know they will make money processing it into gasoline.” Crude oil for June delivery gained as much as 64 cents, or 0.6 percent, to $113.40 a barrel in electronic trading on the New York Mercantile Exchange. The contract was at $113.24 at 8:51 a.m. Sydney time. Yesterday, it climbed 55 cents, or 0.5 percent, to $112.76, the highest since April 8. Brent oil for June settlement increased 99 cents, or 0.8 percent, to end the session at $125.13 a barrel on the London- based ICE Futures Europe exchange yesterday. It was the highest close since April 8.

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