EQUITIES

The Philippine Stock Exchange Index (PSEi) extended its decline for a third straight month in May, falling 1.1% or 64.88 points to close at 5,768.76, its lowest level in six months. The market continued to underperform both regional and global peers, bringing its year-to-date loss to 4.7%, making it the second-worst performer in ASEAN after Indonesia’s JCI. Investor sentiment was weighed down by a challenging macroeconomic environment, including a sharp rise in April inflation to 7.2%, significantly above expectations, and slower-than-expected first-quarter GDP growth of 2.8%. Concerns over rising interest rates, geopolitical tensions, and weak corporate earnings further dampened market confidence.

Global developments also contributed to market volatility, as investors alternated between optimism over a possible US-Iran peace agreement and renewed risk aversion following escalating military tensions later in the month. The resulting fluctuations in oil prices heightened concerns about inflation and economic growth. During the first-quarter earnings season, companies generally reported modest earnings growth, but profitability came under pressure from higher input costs, compressed margins, and elevated financing expenses. Persistent high oil prices also fueled worries about weakening consumer spending and business activity, limiting investor risk appetite.

Technical and flow-related factors added further pressure to the market. MSCI rebalancing led to significant foreign outflows and weighed heavily on several index constituents. Jollibee Foods Corp. (JFC) declined 20.2% after being removed from the MSCI Standard Index, while Meralco (MER) fell 12.5% following a reduction in its foreign inclusion factor. In contrast, ACEN emerged as the top-performing stock, rising 16.2% on renewed investor interest in renewable energy amid the global energy crisis linked to the US-Iran conflict. International Container Terminal Services (ICT) also outperformed, gaining 6.0% on the back of strong earnings and a resilient business outlook.

Foreign investor activity remained a significant headwind, with MSCI rebalancing generating approximately US$100 million in net outflows at month-end. Total net foreign outflows reached US$150 million in May, bringing year-to-date net foreign selling to US$226 million, further contributing to the market’s weak performance.

The lack of resolution of the conflict in the middle east continues to weigh on Philippine equities. The focus is currently on the trajectory of inflation moving forward. While the May inflation print showed a decline month-on-month and was lower than the estimated range by the BSP and of consensus, the core inflation continues to show higher sequential print. The BSP is expected to continue to be hawkish in the near term and domestic government security yields continues to be elevated. On top of this, the local currency continues to be weak. We expect sentiment towards Philippine equities to continue being cautious, albeit the multi-decade low valuations, is attracting some bargain hunting.

LOCAL FIXED INCOME

Local GS yields shifted higher in parallel over May as persistent geopolitical tensions kept market participants largely defensive. Adding to the pressure, the April inflation print surprised significantly to the upside, driving yields higher by 46–81 bps across the curve.

Escalating tensions in the Middle East, coupled with a renewed surge in oil prices, further heightened inflation concerns. These risks soon materialized, with April inflation coming in well above the 5.5% consensus at 7.2%. During the month, oil prices breached the USD 100 per barrel mark while lightening up towards the end the of the month, while the peso weakened to fresh record lows, surpassing 60.

Meanwhile, hawkish remarks from BSP Governor Remolona further weighed on sentiment, as he flagged the possibility of an off-cycle rate hike. Auction demand also remained subdued, with BTr reissuances only partially awarded amid elevated yield expectations from investors.

Outlook

The GS market is likely to remain defensive as the Middle Eastern conflict persists, keeping upward pressure on oil prices. With the possibility of further rate hikes still seen in the near term, yields are seen to move within a relatively broad.

USD

U.S. Treasury yields trended higher during the month, as investors remained alert to the risk of renewed tensions in the Middle East. Reports of a potential ceasefire and ongoing negotiations between the U.S. and Iran, however, helped moderate the upward pressure in yields toward month-end. Yields across the 1- to 10-year segment rose by 5–16 bps, while both the short and long ends saw more modest increases of just 1–5 bps.

The Federal Reserve kept policy rates unchanged in what may have been Jerome Powell’s final meeting as Chair. Nonetheless, the tone remained cautious, with the Fed acknowledging rising upside risks to inflation. Several policymakers indicated that further tightening could still be considered should inflation prove more persistent than expected. April inflation came in at 3.8%, slightly above the 3.7% consensus estimate.

Toward the latter part of the month, global risk sentiment improved following progress in U.S.-Iran ceasefire discussions, helping to ease geopolitical concerns. Meanwhile, the U.S. labor market continued to show resilience, with unemployment claims remaining at relatively low levels.

Outlook

Geopolitical developments and movements in energy prices remain key drivers for global bond markets. With inflation concerns lingering and rate cuts no longer priced in, global yields may remain elevated, keeping investor positioning cautious in the near term.