Global Stocks continue to feel the effects of a tight monetary policy.
- Investors are betting that the Federal Reserve (Fed) will increase rates by 0.75% in its next meeting. This has led stocks to move lower as higher rates are generally taken as a negative by equity markets. Fed Chairman Jerome Powell acknowledged that a restrictive policy is necessary to restore price stability. He also cautioned against any premature policy loosening.
- European leaders are planning to ration energy to halt the rise in prices. Incoming UK Prime Minister Liz Truss is drafting a plan to freeze utility bills rather than allow market forces to dictate price. A similar approach is being discussed in other European countries. Rationing energy demand will be a big challenge for European policy makers and may worsen the energy problem if implemented poorly.
- The US dollar is appreciating to multi-decade highs. The strong dollar is putting pressure on other currencies leading to higher import costs which feeds into inflation. However, the possibility of a slower US economy as the rate hikes take effect may ease the pace of Fed tightening and by extension weakening the US dollar. This would be a positive for other markets as it would ease inflationary pressure.
Philippine Stocks retreated in line with global markets as risks from abroad affected investor sentiment.
- The Philippine Peso depreciated, trading above the 57-level. This has a negative impact on the economy as the country is highly reliant on imports. A weaker currency leads to more inflationary pressure. The recent drop in oil prices is a prime example of how the depreciating peso offsets some of the gains from lower global oil demand as gas prices remain elevated.
- Congress introduced the passive income package of the Comprehensive Tax Reform Program (CTRP), which is a continuation of the tax reforms of the previous administration. It proposed to simplify the method of taxing passive income by placing most rates at 15%. This will gain the government an additional Php30 billion in revenues by 2023.
Philippine Bond Yields ended higher across the curve following the increase in US treasury yields.
- The Bureau of Treasury (BTr) rejected the latest 4-year treasury bond auction. The bond would have fetched an average yield of 5.59%, if awarded. This is significantly above the 5.15% rate fetched during the August 2 auction for a similar bond. Demand for bonds remains robust but market participants are asking for a premium that the government is unwilling to provide.
- August inflation slowed down to 6.3%. This is the first time in six months that inflation has dropped. The rate is within the Bangko Sentral ng Pilipinas (BSP) target of 5.9% to 6.7% for the month. The slight decrease in prices can be attributed to slower increase in transport costs, food and non-alcoholic beverages.
FWD Guidance: Uncertainty leads to downside risks, but diversification and a long-term investment horizon still provide the best chance for financial success.
Sources: (1) https://www.cnbc.com/2022/09/07/market-bracing-for-another-three-quarter-point-hike-from-the-fed-this-month.html (2) https://www.bloomberg.com/opinion/articles/2022-09-06/when-free-energy-markets-end-rationing-must-follow-elements-by-javier-blas-l7q3utrr (3) https://www.bloomberg.com/news/articles/2022-09-06/dollar-pain-spreads-beyond-emerging-economies-to-developed-peers (4) https://www.bworldonline.com/stock-market/2022/09/07/473079/psei-sinks-as-strong-us-data-fan-hawkish-fed-bets/ (5)https://www.bworldonline.com/economy/2022/09/07/473140/passive-income-tax-reform-package-sponsored-in-house-plenary-session/ (6) https://business.inquirer.net/360983/ph-inflation-eased-to-6-3-percent-in-august (7) https://www.philstar.com/business/2022/09/07/2207847/treasury-rejects-t-bonds-rates-soar
Disclaimer: The purpose of this article is to inform and should not be taken as an advice or offer to purchase securities. Seek professional advice before making a decision based on this presentation. Information given does not represent the views of FWD and its agents and employees.