POSITIVE vibes continue to emerge from Wall Street. The US dollar index continued to head higher as the US equities reached its highest since 2007. The better-than-expected US jobs report, the spending cuts under sequestration, continued selling of Japanese Yen and downward pressure on the euro were the added drivers.
The US Congress has indicated that it is likely that it will provide minimum additional flexibility to the Obama Administration to ease implementation. Sequestration is anticipated to reduce real gross domestic product (GDP) growth in 2013 by about 0.6 percentage points with the effects concentrated in the second and third quarter respectively.
The euro found a bottom near 1.2965 for the week under review as the consolidation of the single currency continued to attract bidders with 1.3000 as key resistance and moves seen in this currency were heavily dictated by cross plays on the euro and yen. Post-election Italy continued to dominate as Five Star Movement leader Grillo proposed of holding an on-line, non-binding referendum on Italy's membership of the monetary union and his remarks dovetailed with those made by European Central Bank executive board member Benoit Coeure.
The yen rebounded from a two-week low of 91.73 to above neutral support of 93.00 with a barrage of dovish remarks from Bank of Japan's (BoJ) officials. It was reported that new leaderships in BoJ will likely to abandon speed limits on debt purchases and scoop up longer-term bonds to meet their inflation targets. Kuroda, the nominee to succeed BoJ governor Shirakawa says the so-called bank note rule is not a standard among central banks, indicating a willingness to pilot the central bank into unchartered waters of monetary easing. The yen remained on upside trend as risk appetite resumed and well supported by yen-funded carry trades, importers demand and further signs of global monetary easing respectively.
Into Asian ex-yen currencies, the risk-on environment prevailed, mostly higher against US dollar, led by the won (0.7%), dong (0.3%) as well as the baht and rupiah (0.2%) supported by buying interest in equities despite slightly weaker economic growth momentum. China tightened policies to curb in property prices, Taiwan's and South Korea's foreign reserves dipped in February, Philippines' budget deficit widened in December, India's February Markit services PMI fell on account of weaker new orders and Singapore's February manufacturing PMI fell back into contraction territory. The won was the top gainer on the back of strong net foreign investment in South Korean bonds totalled 3.5 trillion won in February, a 28-month high.
The ringgit eased 0.1% to trade above 3.1080 with lesser degree of election talks given the armed stand-off in Sabah, bearish tone on crude palm oil (CPO) price outlook, a let-down in the February earning season and as Bank Negara kept the overnight policy rate (OPR) at 3%, given the strong GDP print in the fourth quarter. Malaysia's earnings per share have been in single digits for two straight years. At the 2013 Palm Oil Conference, CPO prices forecast ranges from RM1,900-RM2,700 respectively.
During the week, US Treasury (UST) yields seen edging higher versus previous week's close as risk sentiment improved with US stocks extending gains in anticipation that the US economy may add more jobs during the month of February. At time of writing, yields on two-, five- and 10-year seen closing at 0.25%, 0.85% and 2% respectively.
Malaysian bond market
All eyes were seen focusing on the much anticipated Bank Negara monetary policy decision this week. As widely expected, the central bank held the OPR unchanged at 3%. We believe the current OPR level as appropriate and remain accommodative, hence supportive of domestic growth. Domestic growth prospects remain healthy with indicators pointing towards robust investment activity and continued expansion in private consumption. Private consumption is supported by sustained income growth amid stable labour market conditions. In the case of inflation, the consumer price index remains benign at 1.3% as per latest January 2013 data. Going forward, inflation is expected to rise but expectations are at a moderate pace and expected to remain contained.
Bank Negara says there have been improvements in the advanced economies, while risks to sustained recovery remain. In Asia, growth continues to be supported by domestic demand and a gradual improvement in intra-regional trade.
In the Malaysian Government Securities/Government Investment Issues market, RM10bil worth of trades transacted at the time of writing with a daily average trading volume of RM2.5bil, below last week's average of RM4bil. As of Thursday's close, benchmark yields on three-, five-, and seven-year were done unchanged from last week at 3.05%, 3.23% and 3.41% respectively. Yields for 10-, 15- and 20-year came down 1-3 bps at 3.44%, 3.69% and 3.87% respectively.
On private debt securities, total trading volume amounted to RM2bil, of which 51% came from the GG/AAA, 44% from the AA segments and the remaining trades from the single A segment. As of Thursday's close, daily average trade volume was RM511mil versus RM700mil average seen in the previous week.
In the GG/AAA segment, active trading was seen on DanaInfra bonds maturing 2023-2027 with total trading volume of RM110mil. Other notable trade include Sime Darby 11/16 with yield coming down 3 bps to 3.51%, garnering RM100mil in trading volume.
In the AA-rated segment, UEM Land 12/17 garnered total trades worth RM75mil at 4.02%, 4 bps lower from previous trade date. First Resources 12/17 traded at 4.22% with a total trade volume of RM60mil done.
MYR IRS market
The ringgit (MYR) interest rate swap (IRS) rates rebounded from the months' low in tandem with regional rates as better-than-expected US data spurred risk buying. The IRS curve ended the week by circa 1-8 bps higher.
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