Jumbo Fed rate cut seen PSEi positive

The US Federal Reserve has cut its key lending rate by half a percentage-point Wednesday in its first reduction for more than four years, sharply lowering borrowing costs shortly before November’s presidential election.

The Fed’s move is a win-win for the Philippines, in the sense that it can either inspire the Bangko Sentral ng Pilipinas (BSP) to be more aggressive in easing its policy or that the BSP can hold its course and allow the interest rate differential with the US to widen back to “normal” levels of between 2 percent to 3 percent.

The first scenario would be a big win for equities and the broader economy, while the second scenario would be a big win for the peso and net importers.

Medium-term, we expect the Fed’s move to be a positive for the markets. However, AP Securities said it might see some sell-on-news action as well, especially with the PSEi trading near resistance levels.

AS Securities said there has been some noise about historical instances of market downturns following monetary policy pivots.

However, we find that this belief is based on the improper assumption that this pivot is similar in nature to previous ones. Previous rate cuts were done in response to crisis events and in an attempt to avert the looming risk of a recession.

Peso appreciates

The peso strengthened against the US dollar after the substantial easing.

The peso closed at P55.61 per dollar on Thursday, appreciating from P55.72 per dollar recorded during the previous trading on Wednesday, data from the Bankers Association of the Philippines showed.

“This was a new six-month low from 58.58 recorded on March 18,” Rizal Commercial Banking Corporation chief economist Michael Ricafort said.

A survey by Reuters said half of investors had been anticipating the aforementioned size in rate reduction, following a record-low inflation rate and a slight improvement in jobless rate in the US last month.

Meanwhile, the Bangko Sentral ng Pilipinas cut its rate ahead of the Fed last month to drive stronger consumption of goods and services amid projected lower local inflation rates.

Ricafort said these developments signal a higher demand for peso which will be partly backed by BSP’s lower reserve ratio requirement.

BSP Governor Eli Remolona Jr. on Wednesday said he was looking to “substantially” cut the ratio this year to allow banks to lend more funds to clients.

Green day

The local stock market gauge on Thursday ended in green, strengthening by 46.26 points, or 0.65 percent, to breach 7,200 levels, closing at 7,202.16.

Most sectors were up, with Miners leading the advancers at a 2.43 percent increase, followed by Banking and Properties gaining by 1.95 percent and 0.93 percent, respectively.

Industrial was the lone shredder down by 0.12 points.

Nickel Asia Corporation was the top index gainer, jumping by 6.34 percent to P3.69. Jollibee Foods Corporation, on the other hand, was the biggest loser, down by 2.21 percent to P257.00.

International Container Terminal Services, Inc. was the most actively traded stock at P765,399,680, down by 0.30 percent, followed by Ayala Corporation at P757,461,315, up by 1.12 percent.

Regina Capital Development Corp. head of sales Luis Limlingan said the Federal Reserve’s first cute rate in four years boosted the sentiment as it lowered interest rates by 50 basis points to a range of 4.75 percent to 5.00 percent.

He added that gold prices eased following reaching an intraday all-time high, with spot gold dipping 0.40 percent to $2,560.29 per ounce.

“Oil prices also softened, with Brent crude slipping 0.07 percent to $73.65 per barrel, reacting to the larger-than-expected rate cut,” he added.

The net market value turnover closed at P8.16 billion, with 113 winners and 78 losers, while 62 names remain unchanged.

The peso closed at P55.72 from a dollar.