China selloff sends markets into a tailspin

Stocks plunge, peso falls

MANILA, Philippines - The Philippine stock market suffered  heavily yesterday, falling below the 7,000 mark in what analysts called a bloodbath amid widespread selloff as panicky investors unloaded their shares due to lingering concerns on the Chinese economy and the devaluation of the yuan.

The peso also bore the brunt of the market fall, losing 31.5 centavos to hit a five-year low against the   dollar in sync with other currencies in the region.   The peso  closed at  46.815 to $1 from Friday’s  46.50 to $1. This was the lowest in more than five years or since June 7, 2010 when the peso closed at  46.83 to $1.

At the end of yesterday’s session, the benchmark Philippine Stock Exchange index (PSEi) closed at 6,791.01, down   487.97 points, or 6.70 percent, wiping out about P764 billion on paper and marking the sharpest fall in two years.  Similarly, the broader All-Shares index plunged 276.42 points, or 6.65 percent, to 3,881.70.

But Philippine Stock Exchange (PSE) president Hans Sicat said yesterday’s market behavior should not be seen as a regional crisis.

 “This should not be seen as a regional financial crisis compared with that of the US financial crisis in 2008 because banks are not the cause. China is the catalyst of the nervousness,” Sicat said.

“It is a China driven macro panic,” said Didier Duret, chief investment officer at ABN Amro. “Volatility will persist until we see better data there or strong policy action through forceful monetary easing.”

The near nine percent slump in Chinese stocks was their worst performance since the depths of the global financial crisis in 2009 and wiped out what was left of the 2015 gains, which in June has been more than 50 percent. The latest rout was rooted in investor disappointment that Beijing did not announce expected policy support over the weekend after its markets shed 11 percent last week Massive selloff

Astro del Castillo, First Grade Finance Inc. managing director, said in a phone interview reports of weakness in the Chinese economy triggered the selloff. “The yuan devaluation and pending US rate hike contributed to the uncertainty. Market reaction can be considered panic selling to many but for some we see it as a good opportunity to accumulate. Expect volatility to remain,” he said.

At the same time, he said, there are opportunities for cherry picking. At around 6,800 to 6,700, further downside of PSEi is limited.

 “Expect a bounce tomorrow or the next day. This market condition is for the brave,” Del Castillo said.

Justino Calaycay of Accord Capital said panic gripped the markets as “China’s equities drew the most blood since 2007.”

 “There is no other way to describe how today’s week-opening trades went. It was a rout  no more, no less,” he said.

Similarly, Banco De Oro’s chief market strategist Jonas Ravelas said the negative data out of China sent investors jittery.

China’s manufacturing sector index fell to a six-year-low in July, underscoring prevailing weakness in the world’s second largest economy.

Calaycay said investors can buy on expectations of a technical rebound, look for bargains such as blue chips, industry leaders or election stocks or simply stay at the sidelines and exercise patience.

External factors

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said the local financial markets have recently been greatly affected by external developments including the shift in the Chinese yuan to a more market-influenced foreign exchange system, further declines in international oil prices, as well as the market interpretations of the intentions of the US Federal Reserve on the path and timing of its policy normalization.

“With the interconnectedness of global goods and financial markets, the local financial markets are often the first to reflect any external developments onshore,” Tetangco said. 

He explained the near-term outlook continues to be that of more volatility in both the global and local financial markets.

“Given that these (factors) are largely outside of our direct control, the BSP will continue to allow the exchange rate to adjust to market conditions, “ he said.

However, the BSP chief pointed out monetary authorities would carefully provide liquidity in the market should the exchange rate volatilities become excessive, disruptive to business planning, and a trigger for the disanchoring of inflation expectations.

“So far, the peso volatility has remained within the middle of the range of the volatilities of regional currencies, and inflation expectations are still well-anchored. That said, we are keenly aware that we need to also consider these developments with a medium term lens,” Tetangco said.

He explained the calculated opening up of the Chinese markets and the potential increases in the Fed Fund’s target rate are part of the global normalization process.

These should, according to him, over time lead to more balanced global growth, which could also lead to more normal prices of oil in the international market.

“Therefore, on the part of the BSP we will continue to craft policies that will keep inflation low and stable so as to preserve the consumers’ purchasing power and sharpen supervision of banks and continue to pursue the banking reform agenda that will help ensure the soundness of banks,” he said.

Tetangco said sound fundamentals would help shore market and business confidence.

“More importantly, these will also provide the lubricant for the national government to step up spending on the infrastructure that are needed to sustain the domestic drivers of growth and keep the economy moving at a respectable pace, even in the face of external volatility,” he said.