Market’s short-term direction unclear as election results remain uncertain

After a brief pre-elections run-up, local stocks failed to sustain a mild rally last week even as a generally peaceful nationwide poll was seen as final hurdle in the country’s political transition and finally pave the way for a vigorous pursuit of the administration’s economic agenda.

But with the still uncertain outcome of last Monday’s elections, the market’s short-term direction is likewise unclear, judging by the way the main index moved in a tentative manner last week.

"The market may react positively if there are any indications that the government bets are winning. But the elections will not always be the market driver that it is right now. Ultimately, investors will need to focus more on the economy and corporate earnings," AB Capital research manager Jose Vistan Jr. wrote at PhilStocks.net.

At the end of the week, the 30-company composite index slipped 36.21 points or 2.44 percent week-on-week to 1,448.62.

He said the bullish momentum prior to the polls was not sustained as volume has gone back to their low levels while volatility diminished. "The Phisix is now back within its intermediate downtrend channel with the upper band providing solid near term resistance. It will be faced with a few more days of lackluster sideways movement within the trading range of 1,430 to 1,480," he added.

Vistan emphasized that for this week, the direction of the market will be gauged by the outcome of the recent elections, arguing that a victory for the administration bets will improve the chances of an economic recovery although this is not a guaranteed thing.

"Investors will still be on hold and make sure that the coast is clear before returning to the market. The market will watch and wait since no concrete economic programs have been laid out as of now," he added.

Vistan said not even the generous interest rate cuts both by the US Federal Reserve and the Bangko Sentral, along with a rare occurrence of a lower-than-programmed government budget deficit in four months failed to lift the market’s sentiment as election jitters hounded investors.

The US Federal Open Market Committee lowered its key rate by another 50 basis points to four percent. The latest cut was the Fed’s fifth for the year and this brings the total to 250 basis points in cuts for just more than four months. As in the previous reductions, the latest cut is intended to stimulate the US economy and stave off a global recession.

And as in the past, the cut in US rates prompted a similar cut in local interest rates. The Bangko Sentral ng Pilipinas (BSP) announced a 50 basis point cut in their overnight borrowing rate to nine percent and overnight lending rate to 11.25 percent.

The decline in domestic interest rates was also inspired by a lower-than-programmed government budget deficit during the first four months of the year. The Department of Finance (DOF) said that the government was able to collect P61.44 billion in April while expenses amounted to only P60.23 billion for that month. Because of this, the January-April budget deficit dwindled to P36.72 billion, or P1.6 billion lower than the P38.27-billion deficit ceiling for the period. The market didn’t react to the positive report as the surplus came at a time when individual and corporate tax payments were seasonally high.

"We still have a long way to go before we can shift to a higher terrain in confidence. This cautiously optimistic perception is not enough to bring the money back to the market. In view thereof, investors are still advised not to rush back to the market as we don’t have a whole wave of news ahead of us," Vistan said.

Among the developments to watch out for next week, he added, is the result of the Morgan Stanley Capital International (MSCI) review of its index due on Saturday, as there is a possibility that the Philippine’s weighting in the index may be reduced marginally.

The changes have huge implications for global fund flows. It is estimated that $500 billion in global funds are directly linked with its indexes and $3 trillion in funds worldwide are benchmarked against them.