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THE S&P 500 extended its three-day rally in response to comments from the US Federal Reserve as well as improving US data flows.

Further strengthening the US dollar, the world's reserve currency open notably stronger against the yen. European news flows indicate there is a significant disconnect across markets with investors once again choosing to ignore the fact that policy makers are no closer to the establishment of a banking union, which was initially flagged as a key instrument in dealing with bank bailouts when raised all of 12 months ago.

Investors also shook off China's cash crunch and concerns eased that the US Federal Reserve will start to taper sooner rather than later. Vice-chairman of FOMC and Fed presidents William Dudley asserted that the recent shift in the market-implied path of interest rates is “quite out of sync” with FOMC statements and expectations. Statements by other Fed presidents Jerome Powell and Dennis Lockhart echoed this sentiment. But it is the Fed's bond purchases that have driven mid- and long-term rates 200-300 bps below normal.

The euro fell to three-week lows against a broadly strengthening greenback, a move lower facilitated by dovish remarks from the head of the European Central Bank. Its president Mario Draghi said local central bank policy would remain accommodative “for the foreseeable future”. Some of his colleagues have signalled a readiness to do more to dig the region out of recession, despite a run of confidence surveys from Germany and France, the region's heavyweight economies, which have shown improvement.

On the other hand, the Japanese yen reached the recent two-week lows against the greenback, as demand for safety cooled amid a reduction in worries about events in the U.S. and China. An early week global stock selloff had buoyed the yen when investors feared the Fed might move too soon to curb stimulus while worries about a slowing Chinese economy were heightened by local financial market instability. However, allaying those concerns have been rosier U.S. data and rhetoric from Beijing officials who seemingly took the risk of a near-term meltdown scenario in China off the table. Chinese central bank officials sought to alleviate concerns at a press conference by committing to guide interest rates back to reasonable levels.

With an exception of Thai baht and yuan, other Asian currencies traded on risk-on mode with the won, peso and rupiah, leading the gain against the US dollar (USD). The won gained 1.4% compared with the peso and the rupiah of 1%, respectively.

The ringgit (MYR) ended the week on a stronger note, being the second strongest Asian currencies after the won, on equity flows and a tad bullish on bonds as buying interest continued in the short end to belly the curve on both onshore and offshore flows. Having said that, a higher USD-yuan fixing kept the bullish momentum on MYR in check.

Macro data wise, Malaysia reported the Leading Index (LI), which provides an early signal of the direction of the economy, slowed to +0.8% month-on-month in April, after inching down to +1.1% in March and compared with +1.3% in February due to a slowdown in real imports of semiconductors and stagnating real money supply.

UST market

US Treasuries (UST) traded mixed during the week, with yields surging higher during earlier opening sessions. However, by mid-week, the latest data on first-quarter US GDP, revised lower to 1.8% than market expectations, helped to par some of the losses seen earlier in the week. At the time of writing, yields of UST notes on two-, five-, and 10-year was seen hovering at 0.36%, 1.38% and 2.48% respectively.

Malaysian bond market

Local govvies traded mixed, trading on a softer tone tracking upwardly movement in UST and a somewhat softer ringgit during the start of the week. However, by mid-week, some of the benchmark local govvies rebounded a tad higher in price terms after the ringgit rebounded a tad stronger. On a related note, recent upward movement in local government bond yields could have appeared attractive to market players, prompting bargain hunting activities, hence, paring earlier losses seen during the start of the week. Meanwhile, the reopening of seven-year Government Investment Issues attracted a reasonable demand of 1.898 times despite a larger than expected tender size worth RM4bil. As of Thursday's close, benchmark Malaysia Goverment Securities yields for three-, five-, seven-, 10-, 15- and 20-year were seen closing at 3.31%, 3.47%, 3.55%, 3.6%, 3.82% and 3.95% respectively. About RM13.3bil worth of trades transacted with daily average trading volume of RM3.3bil compared with last week's RM2.8bil.

Moving into the local PDS space, total trading volume amounted to RM3.1bil, of which 51% came from the GG/AAA segment, 48% from the AA segments and the remaining balance from the single-A segment. The daily average trade volume was higher at RM796mil compared with the RM802mil average seen in the prior week. In the GG/AAA segment, active trading was seen emerging for a slew of PLUS bonds maturing 2018-2037, with a collective volume of RM421mil transacted, with most yields ending about 4bps-13bps higher from previous last traded levels.

Meanwhile, Korean Development Bank '16 attracted volume of RM42mil with yields inching about 3bps to close at 3.74% at time of writing.

On the AA space, Noble Group bonds maturing 2014-2016 attracted a collective volume of RM205mil transacted. Other notable trades include a slew of AA2-rated First Resources Ltd bonds maturing 2017 with total volume of RM71mil done. First Resources 7/17 and 12/17 seen traded at 4.13% and 4.14% respectively, relatively unchanged versus previous week's trade levels.

MYR IRS market

The ringgit interest rate swap (MYR IRS) rates jumped to a year's high, at the start of the week as UST yields surged. Rates softened subsequently following UST movement as talk of quantitative easing tapering receded. The IRS curve ended the week by circa 1~10 bps lower.

? For enquiries, contact: fx-research@ambankgroup.com or bond-research@ambankgroup.com


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