Peso, stocks plunge on US rate concerns

Financial markets tumbled yesterday on concerns the Bangko Sentral ng Pilipinas (BSP) may raise local borrowing costs if the US keeps raising interest rates.

"Prospects of more Fed increases puts pressure on the central bank to widen the rate differential gap," Edgar Bancod, head of research at Manila-based ATR-Kim Eng Securities said.

When that happens, stocks become "less attractive." The Philippine Stock Exchange Index plunged 84.83, or 3.4

percent, to settle at 2,378.74. It was the biggest slide since a 4.2 percent drop on July 4, 2005.

In the US, the Dow Jones Industrial Average yesterday had its biggest drop in almost four months after a government report showed consumer prices rose more in April than economists forecast, fanning speculation the US Federal Reserve will add to 16 straight increases in interest rates.

The peso also took a beating at the currency market yesterday as regional currencies resumed their fall against the dollar in the wake of rising inflation in the US.

The local currency plunged by 53.50 centavos to close at 52.595 to a dollar after recovering some lost ground on Wednesday due to weak dollar demand.

The peso hit an intraday low of 52.680 before recovering slightly to close at 52.595 to $1 which was still more than 53 centavos lower than Wednesday’s close of 52.060 to $1.

Exchange rate movements will be a factor in future policy rate decisions, BSP Governor Amando Tetangco said earlier after the Fed raised its benchmark rate to five percent.

"The local market is reacting to what’s happening to the US and elsewhere," Jerome Gonzalez, who helps manage about $17.5 million at Manila’s PhilEquity Fund.

Although the release of the latest fiscal data provided some cushion for the peso, monetary officials said the local currency was not spared from the regional weakness.

Regional currencies have been suffering from more indications that the US Fed would continue raising US interest rates and the release of the April consumer price index in the US fueled fresh speculations of another hike in US rates.

Higher US rates tend to take funds away from emerging markets.

The BSP said the peso was no different from other currencies in the region although monetary officials said it was getting ample support from dollar inflows from overseas Filipino workers (OFWs).

Remittances from OFWs are expected to surge in the coming weeks, as workers abroad send money to their families ahead of the reopening of classes in June.

On Wednesday, BSP governor Amando M. Tetangco Jr. said OFW remittances pushed the recovery of the peso and the same was likely to occur in the next few days.

As US interest rates were raised to the highest level in five years, BSP has not touched its own policy rates, saying that the move of the US Fed did not change the scenario considered by the Monetary Board last week.

The US Federal Open Market Committee or FOMC boosted Americans’ borrowing costs for the 16th time in a row on Wednesday – no surprise to the market which has been expecting the latest policy move.

According to the BSP, the FOMC move was already contemplated by the MB when it held its own policy-setting meeting last week and ultimately decided to keep its policy rates unchanged.

At present, the BSP’s overnight borrowing rate is at 7.50 percent and the lending rate is at 9.75 percent. These rates were last touched in October 2005 when the MB approved a 25-basis-point increase.

Losers edge gainers

Ayala Land, the Philippines’ biggest developer, dropped 75 centavos, or 5.1 percent, to P14. Rising interest rates will make it more expensive for Filipinos to buy homes.

Ayala Corp., the holding company for businesses owned by the third-richest family in the Philippines, dropped P12.5, or 2.9 percent, to P420. Its phone unit Globe Telecom Inc., the second-largest phone company, declined P30, or three percent to P965.

Philippine Long Distance Telephone, the country’s largest company by market value, dropped P100, or 4.8 percent, to P2,000 after two legislators revived a proposal to impose a 50 centavo tax for every mobile phone text message.

A tax on text messaging, which accounts for half of PLDT and Globe’s revenue, may reduce the volume of text messages sent by the nation’s more than 34 million mobile phone users.

Metropolitan Bank & Trust Co., the Philippines’ biggest lender, fell P1.5 , or 3.75 percent, to P38.5 after it reported a 13 percent rise in first quarter profit to P1.8 billion ($34 million). It traded as low as P37.5 before earnings were announced in the run-up to the close.

Bank of the Philippine Islands retreated P1.5, or 2.3 percent, to P38.5.

Shares worth P2.4 billion were traded, 58 percent more than the six-month daily average. Losers edged gainers, 106 to 9, with 30 stocks unchanged.