Philippine Markets: 12 August 2011

12 August 2011 

USD/PhP:          42.64           + 0.10        PSEi:             4321.73                        + 10.71         

USD/JPY:           76.67                        PFINC:                   999.69                        + 8.05 

EUR/USD:         1.4185                        BDO:                  60.00                        - 0.80 

GBP/USD:         1.6179                        BPI:                  57.95                        + 0.60 

PDSTF3M:         2.0250                        MBT:               75.70                        + 1.30 

Prices as of  4:00pm                        Source: Bloomberg, Reuters 

Philippine Interest Rate Outlook 

Secondary market rates moved down by an average of 32 basis points week-on-week as investors sought safety of government debt amidst volatility in the financial markets.  As inflation remains contained, investors are expecting monetary board to keep interest rates unchanged during the next policy meeting in September as economic growth could slowdown due to recent events in developed markets.  Expect interest rates to remain on the low side and move sideways next week. 

Philippine Equities Outlook 

Local shares lost 2.61 percent week-on-week to 4321.73 as global equity markets experienced high volatility after the downgrade of US credit ratings.  The swings in the US equity markets were huge causing panic in global markets.  The PSEi index reached 4,129.30 low during the week, erasing all the year to date gains, but managed to stay in the positive territory again as bargain hunting took place led mining shares.  Expect volatility to continue next week. 

Chartwise, the week’s close at 4,321.73 could see a possible retest of 4,400, however with risk aversion flaring worldwide, any rally could be met by sellers and could still put the 4,100 levels  at risk.

Philippine Peso Outlook 

The local currency depreciated 0.14 percent week-on-week to 42.64 as risk aversion dominated market theme this week.  The currency continues to take its cue to dollar movements against the major currencies especially the euro. 

Chartwise, as long as the 42.25 support level holds, a near-term bounce back to 43.00 levels is still in the cards.  A break below the said level will signal the resumption of the test of the 41.00 levels.

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The recent downgrade of the US long-term debt rating has created a new period of uncertainty. Not until last Saturday, the global sentiment had been more of RISK ON.  But with the recent downgrade, global investors got more than warning sign that the global recovery remain slow and uncertain.

So what does this mean for investors? The markets will remain volatile for now and may last for another 2-3 weeks(normally risk aversion periods may last longer up to 6 weeks). At such time investors may be more comfortable taking on more risks, provided no additional deteriorating news comes. 

Please see table below on near-term expectations for the market: 

BDO UNIBANK, INC. 

Jonathan Ravelas

Chief Market Strategist

(632) 858-3145 

Morning Brief: 12 August 2011

Gov’t sets PPP auction  EIGHTEEN COMPANIES, so far, have signified their interest to bid for the P1.956-billion Daang Hari-South Luzon Expressway (SLEx) link -- the government’s first public-private partnership (PPP) deal that may finally be auctioned off, on Dec. 28.  "There are 18 bidders [sic] for the first [PPP deal]," Finance Secretary Cesar V. Purisima told reporters at the sidelines of the 3rd Corporate Treasury & CFO Summit Philippines held yesterday in Makati City. The Department of Public Works and Highways (DPWH), the agency implementing the project, invited investors to pre-qualify for the bidding last month. "There are 18 companies who have bought the invitation documents for Daang Hari," Public Works Secretary Rogelio L. Singson confirmed separately by phone. "The bidders are mostly local companies. Some of them already operate toll roads," Mr. Singson explained, citing Metro Pacific Tollways Corp. (MPTC), the operator of the North Luzon Expressway, and Citra Metro Manila Tollways Corp. (Citra), the operator of the South Metro Manila Skyway Project. DPWH yesterday released the preliminary list of companies that have bought bid documents, namely: Citra; China International Water & Electric Corp.; CM Pancho Construction Inc.; DM Consunji, Inc. (DMCI); EFC Enterprises; IL & FS Transportation Networks Ltd.; JD Legaspi Construction; Ayala Land construction arm Makati Development Corp.; Moldex Construction, Inc.; Sy-led Monte Oro Grid Resources Corp.; MPTC; Malaysia-based MTD Group; Ramon S. Ang-chaired Optimal Infrastructure Development, Inc.; R-II Builders, Inc.; South Luzon Tollways Corporation (SLTC); Star Infrastructure Development Corp.; UEM-MARA Philippines Corp.; and Vicente T. Lao Construction. MPTC President Ramoncito S. Fernandez confirmed via text yesterday that "Yes, MPTC bought bid documents." SLTC Spokesperson Christiaan S. Orlina also validated the report. "We bought the invitation documents because we feel that we are the best qualified to finance, design, construct, operate and maintain the Daang Hari," Mr. Orlina said by phone. DMCI Executive Vice-President Edilberto C. Palisoc, however, confirmed only the construction firm’s interest, saying via text, "Yes, we will purchase [the documents]." Interested parties can still purchase bid documents from the Central Procurement Office of the DPWH until Sept. 16 for a non-refundable fee of P50,000. All qualification documents have to be submitted by Sept. 19. A pre-bid conference will be held on Oct. 28. Interested investors must submit their formal bids to the DPWH by Dec. 28, the same day the bids will be opened, Mr. Singson said. The P1.956-billion project includes construction of a four-kilometer, four-lane paved toll road that will connect Bacoor, Cavite to the South Luzon Expressway. The road "will address the requirement for additional access between Metro Manila and Cavite where rapid urbanization and consequent worsening of traffic situation is being experienced," the project brief states. The project specifically consists of: • paying for advanced work completed by Alabang-Sto. Tomas Development, Inc. in 2009; • financing and construction of the remaining works for Segment I at the junction of Daang Hari and Daang Reyna; • financing, design and construction of Segment II at the Susana Heights Interchange; as well as • the operation and maintenance of the entire Daang Hari-SLEx Link Road as an open-system tolled expressway. The project will be implemented under a build-transfer-operate arrangement, whereby the private sector party will build the road and assume all construction-related risks. Once the facility is completed, the title will be transferred back to the DPWH. The private sector party will operate the highway on behalf of the government and will be authorized to collect toll from users. The DPWH will be responsible for toll-setting. The Daang Hari-SLEx link should have been the second PPP deal to be rolled out by the government, after the P15-billion operation and maintenance contract for the Light Rail Transit Line 1 and the Metro Rail Transit Line 3 was opened to investors in March. Bidding for that project had been scheduled for July 11. However, the PPP deal for the commuter train lines was shelved last month after a change of leadership at the Department of Transportation and Communications. The government has said it aims to auction off at least 10 PPP projects this year.  VAT on toll to be collected by October  Toll on all privately-run expressways are to rise by 12 percent on October 1 with the slapping of value-added tax (VAT) on their operations, according to a government announcement on Thursday. The move, which has been fiercely opposed by motorist and transport groups who expected the tax to be totally passed on to toll users, is expected to give the government an additional P2 billion a year in revenues to help keep state finances healthy. “The BIR (Bureau of Internal Revenue) in a meeting with toll road operators and the Toll Regulatory Board (TRB) agreed to impose VAT on toll on October 1,” the TRB said in a text message to reporters late Thursday. The implementation of the VAT was held back a month later than the original target of September 1, TRB Spokesperson Julius Corpuz said. “This is to give the toll operators ample time to prepare for a smooth implementation (of higher fees),” he said. Notices would be published in newspapers once the new rates for each highway were finalized, he added. The Department of Finance ordered the imposition of VAT on toll last year as it struggled to find new sources of income. The Supreme Court earlier issued an order temporarily restraining the imposition of VAT on tolls, but in a decision last month, sided with the government on the issue.

U.S. Stocks Rally as Profits, Drop in Jobless Claims Offset Europe Woes U.S. stocks rallied, reversing yesterday’s drop for the Standard & Poor’s 500 Index, as a decline in jobless claims and better-than-estimated corporate earnings tempered concern Europe’s debt crisis is worsening. All 10 groups in the S&P 500 advanced at least 2.5 percent, with gains being led by financial, energy and raw-material companies. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) rallied more than 6.7 percent, after plunging at least 5.5 percent yesterday. Cisco Systems Inc. (CSCO), the world’s largest maker of networking equipment, soared 16 percent, the most since May 2002, as profit and sales beat analysts’ estimates. The S&P 500 surged 4.6 percent to 1,172.64 at 4 p.m. in New York. The gauge had plunged as much as 18 percent from its 2011 high and yesterday traded at 12.3 times reported earnings, the lowest valuation since March 2009, according to data compiled by Bloomberg. The Dow Jones Industrial Average jumped 423.37 points, or 4 percent, to 11,143.31 today. U.S. 30-Year Bond Yield Rises Most Since 2008 on Concerns About Inflation Treasury 30-year bonds tumbled, pushing yields up the most since 2008, on speculation Federal Reserve policies will stoke inflation, which sapped demand at the $16 billion offering of the securities. The first auction of the debt since Standard & Poor’s cut the U.S. credit rating on Aug. 5 drew the lowest level of demand since February 2009. Today’s auction produced a yield of 3.750 percent, compared with the average forecast of 3.622 percent in a Bloomberg News survey of eight primary dealers. “People didn’t show up for this one,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 20 primary dealers that are obligated to participate in U.S. auctions. “Increased worry about inflation has to get priced into the long bond, given the Fed’s accommodative stance. For now, there will be apprehension to buy that far out on the curve at these yield levels.” The current 30-year bond yield increased 25 basis points, or 0.25 percentage point, to 3.77 percent at 5:01 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 4.375 percent securities maturing in May 2041 dropped 5, or $50 per $1,000 face amount, to 110 25/32. The yield rose as much as 29 basis points, the most on an intraday basis since Nov. 21, 2008, when the S&P 500 Index soared 6.3 percent after falling to its lowest level in 11 years during a period of extreme volatility following the bankruptcy of Lehman Brothers Holdings Inc.

Crude Oil Declines, Heading for Third Weekly Drop, on Concern Over Economy  Oil fell in New York, heading for a third week of declines, as concerns the U.S. economy is slowing countered an unexpected drop in unemployment benefits in the world’s biggest crude-consuming nation. Futures slipped as much as 0.4 percent today, the first drop in three days. Prices rose yesterday after the number of applications for U.S. unemployment payments fell 7,000 in the week ended Aug. 6 to 395,000, the fewest since early April. Other reports showed consumer confidence fell and the trade gap widened in June to the highest level since October 2008. Crude for September delivery fell as much as 35 cents to $85.37 a barrel in electronic trading on the New York Mercantile Exchange and was at $85.44 at 9:49 a.m. Sydney time. The contract yesterday gained 3.4 percent to $85.72. Prices are down 1.7 percent this week and 13 percent higher the past year. Brent oil for September settlement gained $1.34, or 1.3 percent, to $108.02 a barrel on the ICE Futures Europe exchange in London yesterday. The European benchmark contract settled at a premium of $22.30 to U.S. futures, compared with a record close of $23.79 on Aug. 10.

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: 11 August 2011

Resiliency highlighted  THE PHILIPPINES is resilient enough to see off another possible global crisis, economic managers and analysts yesterday claimed.  "The economic fundamentals of the country are very strong," National Treasurer Roberto B. Tan told BusinessWorld in a text message. He cited the inflation rate, which stayed steady at 4.6% in July, within the 3-5% target range of the Bangko Sentral ng Pilipinas (BSP). "Foreign reserves are at an all-time high," Mr. Tan also pointed out. Central bank Deputy Governor Diwa C. Guinigundo, meanwhile, said: "Our foreign reserves are more than sufficient to cover nearly one year of imports of goods and services" in a separate text message. Gross international reserves, which serve as a cushion to external shocks, were at $71 billion as of end-July, already topping the full-year forecast of $70 billion. Concerns have been raised that the GIR would drop as a large part is comprised of debt papers issued by the United States, which lost its sterling AAA credit rating last week. BSP officials, however, have said that they had undertaken a diversification into other investment-grade assets such as European bonds and gold. Messrs. Guinigundo and Tan also hailed the country’s strong fiscal performance, with the first semester deficit falling to only P17.231 billion, the lowest in over a decade. "Banks also remain sound and stable with improved loan and asset quality and substantial capitalization," Mr. Guinigundo said. A former Finance official, meanwhile, said the country’s newfound political stability could also help it ride out economic shocks. "The absence of political risks from an unpopular administration and uncertain presidential elections, and the high credibility of the current leadership and cabinet are a source of strength," said GlobalSource economist Romeo L. Bernardo, a former Finance undersecretary. Government reforms have also created "higher confidence" among the public, Socioeconomic Planning Secretary Cayetano W. Paderanga, Jr. noted as well. "The Philippines is clearly, clearly stronger this time around," he told BusinessWorld. A global recession triggered by the US’ credit rating downgrade, he added, would "very different" from the 2008-2009 crisis. "Last time, the world was coming out of a bubble but there were several structural weaknesses. Now, it’s weak but the asset issues have been somewhat cleaned [up]," he said. This time around, the possible global recession could be caused by the continuing debt woes of the US and Europe, which Mr. Paderanga admitted could hit Philippine exports. He assured, however, that the "medium-term task of looking for new markets and new products remain." GlobalSource’s Mr. Bernardo claimed the factors that helped the Philippines pull through in 2008-2009 were still present in today’s economy. "We weathered [the previous financial crisis] thanks to resiliency of OFW (overseas Filipino workers) remittances, the BPO (business process outsourcing) sector, the health of the banking industry and the stable macroeconomy. These elements are still around," he said. "Unless the relapse is worse than the original flu, we should be able to similarly weather [a fresh downturn]," Mr. Bernardo added. He cautioned, however, that economic managers had "have already used up a big part of the medicine kit" such as the compression of the fiscal deficit and quantitative easing. China, which helped jumpstart the global economy during the previous credit crunch, also "has less room to pump prime" today.

U.S. Stocks Slump as Dow Falls to Lowest Level Since September on Europe  U.S. stocks tumbled, sending the Dow Jones Industrial Average to the lowest level since September, as banks slumped on concern that Europe will fail to contain its debt crisis and that the economy is faltering. All 10 groups in the Standard & Poor’s 500 Index fell at least 2 percent. Bank of America Corp. and Citigroup Inc. dropped more than 10 percent, pacing losses in financial shares, as the costs to protect the government debt of Greece, Italy, Spain and France rose. Walt Disney Co. (DIS), the largest theme-park company, tumbled 9.1 percent on concerns that the slowing economy and consumer confidence may hurt its businesses. The S&P 500 fell 4.4 percent to 1,120.76 at 4 p.m. in New York. The benchmark gauge jumped 4.7 percent yesterday as the Federal Reserve said it would keep borrowing costs at an all- time low and was prepared to use a range of tools to bolster the economy. The Dow declined 519.83 points, or 4.6 percent, to 10,719.94. About 15 billion shares changed hands at 4:15 p.m., almost twice the three-month average, Bloomberg data show. “The message is that the market is concerned about the financial industry,” Kevin Caron, market strategist in Florham Park, New Jersey, at Stifel Nicolaus & Co., said in a telephone interview. His firm has $115 billion in client assets. “The banks are exposed to a deteriorating economy. The European debt crisis has a whole set of issues. The concern is about a spillover effect of that.” Treasuries Surge on Record Low Yield at 10-Year Auction, Fed View, Europe Treasuries rallied as a $24 billion 10-year note sale drew higher-than-average demand and a record low yield in the first offering of the maturity following Standard & Poor’s downgrade of U.S. credit Aug. 5. U.S. 10-year yields fell for a third straight day after the Federal Reserve offered yesterday a dimmer view of the economy than it did in June. The extra yield Treasury investors get to hold 10-year notes instead of two-year debt was the narrowest in more than two years on investor concern the European debt crisis would worsen. Stocks slumped, erasing yesterday’s gains. “There was very good demand for Treasuries at the auction, especially for direct bidders,” said Ira Jersey, an interest- rate strategist at Credit Suisse Group AG in New York, one of 20 primary dealers that are obligated to bid at Treasury auctions. “The reality is there is still tons of weakness in risky assets, the economy and Europe. As such, the only place to go is Treasuries, regardless of the country’s credit rating. The curve should continue to flatten from here.” The yield on the current 10-year note fell 14 basis points, or 0.14 percentage point, to 2.11 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 rose 1 10/32, or $15 per $1,000 face amount, to 108 30/32. Thirty-year bond yields fell 10 basis points to 3.52 percent. One month-bill rates touched negative 0.005 percent. The Standard & Poor’s 500 Index sank 4.4 percent following its biggest jump in more than two years yesterday, when it rebounded from its worst loss since 2008.

Crude Oil Falls as European Debt Concerns Counter Decline in U.S. Supplies  Oil declined in New York as concern that the European sovereign debt crisis is worsening countered the biggest drop in crude stockpiles since December in the U.S., the biggest consumer of the commodity. Futures slid as much as 2.1 percent after U.S. equities fell and costs to protect French debt reached a record. The European Central Bank bought Italian and Spanish bonds to help reduce borrowing costs, according to people familiar with the transactions. Switzerland’s central bank said it will “significantly” increase the supply of liquidity to lenders. Crude for September delivery dropped as much as $1.75 to $81.14 a barrel in electronic trading on the New York Mercantile Exchange, and was at $81.36 at 8:46 a.m. Sydney time. The contract yesterday rose 4.5 percent to $82.89. Prices are 4.2 percent higher 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