Stock markets dominated by Interest Rate Differential

This point is amply supported by last week's market actions. Early in the week, Bernarke said that the US dollar needed to be strong. The market intepreted it to mean that US Fed rate would not go any lower for sure, and may even have a chance of going up. This, apparently, was perceived as good news, since the concern at the moment is more on inflation than the economy, which most people regard as having bottomed. If US interest rate does go up, it could result in a stronger US dollar, and some investment funds that have flown to commodities as a hedge against weakening US dollar may flow back into US dollars, resulting in lower commodity prices.




That plan worked for two days. Then the European central bank indicated that they may increase interest rate to combat inflation. If they do, then the interest rate differential will widen again, so US dollar fell anew against Euro, and commodity prices were lifted. The graph on gold price, as represented by GLD in the US stock market, shows the effect of these two events on commodity prices. The same for oil price. Of course, the bad news from the US financial sector (re Lehman Brothers) and US jobs data also worked against the US stock market, but the effect of the interest rate diffential cannot be ignored.

When US stock market sneezes, the Philippine stock market usually trembles. Brace for Monday (Oops! Sorry, Monday is a holiday, for Independence Day, the official celebrations ofwhich will be held on 12 June. Holidays in the Philippines can change a few days before the previously assumed holiday. Maybe the government knew the stock market is going to be slammed.)

Phils. issues USD2.25bn Debt Exchange Warrants

The warrants allow the holders to convert to peso-denominated bonds in case of a default.