Morning Brief: 4 November 2010

Peso rise won’t be blocked Authorities ‘not going to fight the market’ -- Palace spokesman MALACAÑANG IS CONCERNED over the economic impact of a strengthening peso but will not move to bar its rise, officials yesterday said. "We’re not going to fight the market for long. The best thing to do is [ensure that the appreciation] does not happen too rapidly," Presidential Communications Group Secretary Ricky A. Carandang said in a telephone interview. The currency continued to gain against the US dollar yesterday, closing at a nearly two and a half year high of P42.590 to the greenback. The gain has been attributed to strong capital inflows, which analysts expect to be further boosted by the US Federal Reserve’s awaited announcement this morning of a fresh stimulus effort. The peso has strengthened by over 8% this year, making Philippine exports less competitive and reducing the value of overseas Filipino workers’ (OFWs) remittances, a key driver of consumption. Exporters have so far been relatively silent, unlike during the currency’s 2008 rally. Yesterday Philippine Exporters Confederation President Sergio Ortiz-Luis, Jr. reiterated claims that some firms had stopped taking orders or were downsizing. "The exporters are not competitive anymore. Most of are small-medium [enterprises], [and] certainly it will affect employment," he said. The Bangko Sentral ng Pilipinas (BSP) has ruled out capital controls and last week further liberalized foreign exchange rules to facilitate dollar outflows. "[What authorities] can do is make the journey gentler. We can’t reverse where the market is leading," Mr. Carandang said, adding that the situation remained manageable. "... I’m happy to report that other countries are feeling the appreciation of their currencies more than we are. So to some extent, we’re cushioned from the effect," he said. Presidential spokesman Edwin Lacierda, meanwhile, told reporters: "There is a concern because you have to balance exporters and the OFWs and all other concerns." "We have to study the matter. The BSP will be on top of the situation," he added. The central bank yesterday said last week’s forex rule adjustments were not expected to have an immediate effect -- they have not been even officially published -- on exchange rates. "[The] market only knows about it," BSP Deputy Governor Diwa C. Guinigundo said in a text message. The peso’s 16.5-centavo gain yesterday to P42.590 per dollar -- the strongest since it closed at P42.480 on May 9, 2008, was due to "portfolio inflows in the equity market and the dollar remittances from OFWs," said Jonathan L. Ravelas, Banco de Oro chief market strategist. Marcelo E. Ayes, senior vice-president at Rizal Commercial Banking Corp., added that "the pending [US Fed] announcement of the second round of quantitative easing is also a factor on the positive momentum of the peso." The Fed is expected to announce early this morning a new round of US debt purchases in a bid to boost the country’s struggling economy. With more dollars becoming available, Mr. Ayes said: "the peso will remain volatile, it may go from P42.50 to P42.25 at the maximum or bounce to P42.75, but it will surely bounce back to P43 before the year ends." Banks’ capital floor raised THE CENTRAL bank has set higher capital requirements for investors setting up new rural banks. “The Monetary Board believes the existing minimum capital requirement for RBs (rural banks) is no longer adequate to sustain competitive and robust banks,” the Bangko Sentral ng Pilipinas (BSP) said in a statement yesterday. The new minimum capital requirement will apply to new rural banks. In the case of existing rural banks, the new capital requirement will apply if any the following conditions is satisfied: • conversion of the rural bank into a higher category; • relocation of the head office in areas of higher classification; • when bulk of the rural bank’s assets or deposits are regularly accounted for by branches located in areas of higher classification; and • when the rural bank applies for grant of special banking authorities such as limited trust, foreign currency deposit unit operations, and acceptance of demand deposits and notice of withdrawal or NOW accounts. Rural banks with head offices in Metro Manila must meet a minimum capital requirement of P100 million (up from P26 million, while those in the cities of Cebu and Davao, P50 million (up from P13 million). The new requirement for rural banks setting up head offices in other cities has been set at P25 million; in first to fourth class municipalities, P10 million; and fifth to six class municipalities, P5 million. Aside from setting higher amounts, the central bank also simplified its grouping of cities and municipalities to facilitate the imposition of the new capital requirement. “Affected stakeholders,” the BSP said, were consulted. The new capital requirement will take effect 15 days after the circular containing the rules is published in a newspaper of general circulation. The circular has not been published yet. Rural Bankers Association of the Philippines President Ma. Corazon L. Miller said in a telephone interview yesterday the group supports the new rules. “We agree with the rules. Existing rural banks are not really affected,” she said. “This (new capital requirement) is justified particularly for new rural banks since the cost of operations is high,” she said further. Those planning to set-up new rural banks, she pointed out, will have to purchase a lot for its office and with lot prices as they right now, a small capital will not be enough.

U.S. Stocks Rise as Fed Announces Additional Treasury Purchases U.S. stocks rose, with the Standard & Poor’s 500 Index ending near its highest levels of the day, after the Federal Reserve’s announcement of $600 billion of Treasury purchases sent banks higher. JPMorgan Chase & Co., Fifth Third Bancorp and Bank of America Corp. advanced at least 1.1 percent to help lead gains among lenders.Hartford Financial Services Group Inc. climbed 9.2 percent after lifting its earnings estimate this year. Ford Motor Co. rose 5.2 percent after saying sales increased 15 percent in October. The S&P 500 climbed 0.4 percent to 1,197.96 as of 4 p.m. in New York, the highest since May 3. The Dow Jones Industrial Average added 26.41 points, or 0.2 percent, to 11,215.13, its highest close since the week Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008. “Some people were expecting $500 billion, some thought it’d be spread out over a year,” said James Swanson, chief investment strategist at Boston-based MFS Investment Management, which oversees about $204 billion. “So it was slightly positive for the markets and for the economy.” After fluctuating most of the day, stocks rose after the Fed said new purchases will be about $75 billion a month through June. Policy makers said they will “adjust the program as needed to best foster maximum employment and price stability.” The majority of economists surveyed by Bloomberg expected the Fed would add at least $500 billion to the financial system. Fed Chairman Ben S. Bernanke is trying to boost growth after near-zero interest rates and $1.7 trillion in securities purchases helped pull the economy out of recession without bringing down unemployment from close to a 26-year high. Treasury 30-Year Bonds Tumble as Fed Purchases Other Securities Treasury 30-year bonds fell the most in two months after the Federal Reserve said it will buy fewer of the securities than anticipated by investors in its $600 billion program of purchases to boost the economy. The difference between rates on 30-year bonds and Treasury Inflation Protected Securities touched the widest since May 2008 on concern the Fed will be successful in reigniting inflation. The Fed said in a statement at the end of a 2-day Federal Open Market Committee gathering that it will make 4 percent of its purchases in the 17- to 30-year sector. In its first round of purchases, ended in March, the Fed bought $1.7 trillion in securities, including $300 billion in Treasuries, in an effort to spur economic growth strong enough to lower unemployment from near a 26-year high. “The yield curve should start to steepen because the Fed will focus on 5- to 6- years,” said William Larkin, a fixed income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which manages $500 million. “The risk once they finish is that inflation will be elevated. There’s a good chance we’ll be rip-roaring in terms of growth and inflation.” Thirty-year bond yields rose 11 basis points to yield 4.04 percent at 5:07 p.m. in New York, after earlier reaching the biggest rise since Sept. 9. The 3.875 percent bonds due in August 2040 rose 1 30/32, or $19.38 per $1,000, to 97 4/32.

Crude Oil Increases to Six-Month High on U.S. Fuel-Supply Drop, Fed Move Oil rose to the highest level in six months after a U.S. government report showed that fuel supplies tumbled and the Federal Reserve said it will buy an additional $600 billion of Treasuries through June to boost the economy. Oil jumped 0.9 percent as gasoline inventories fell 2.69 million barrels to 212.3 million last week, the lowest level since Nov. 20, 2009, the Energy Department said. The dollar touched a nine-month low versus the euro after the Fed said it will boost asset purchases to spur economic growth. The product supply drop “caused a knee-jerk reaction, and prices rallied,” said Matt Smith, a commodities analyst for Summit Energy in Louisville, Kentucky. “The Fed move is going to create weakness in the dollar and it shows that the Fed is going to be proactive about stimulating the economy in the long term. Both of those factors are bullish for crude.” Crude oil for December delivery advanced 79 cents to $84.69 a barrel on the New York Mercantile Exchange, the highest settlement price since May 3. Futures have risen 6.4 percent in the past year.

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