POLICY divergence and risk aversion dominated market plays on the back of volatile stock markets and a multi-year lows factory data from the world’s two biggest economies.
As we lead into a two-day G20 meeting of finance ministers, the International Monetary Fund (IMF) has released a report on Global Prospects and Policy Change that highlighted the considerable risk to growth in emerging economies as commodity prices slump. The IMF suggested that both the European Central Bank and Bank of Japan should consider larger stimulus packages.
As ECB president Mario Draghi let the doves loose, the euro tumbled from its high of 1.1204 on Monday to below 1.1130. Draghi acknowledged downside risks to growth and inflation from global weakness and plunging commodities – factors that stand in the way of a robust recovery. He also said the central bank could expand its quantitative easing programme beyond its planned expiry a year from now. Draghi’s concern over the risks facing the bloc’s economy underscored the divergent outlook for policy compared with the Fed, which is on course to raise interest rates. Draghi’s dovish tone essentially removed a pillar of the euro’s resilience.
At the same time, a batch of overall constructive US data helped the Draghi-inspired US-dollar rally. Jobless claims held in a healthy range below 300,000 for a 26th straight week. America’s trade gap narrowed to US$41.9bil in July from US$45.1bil in the preceding month of which the smaller shortfall bodes well for third-quarter real GDP growth. Fed’s Beige Book indicated economic activity “continued to expand across most regions and sectors”, added evidence that the US economy is continuing to grow steadily.
The yen strengthened by 1.2% against the US dollar to trade below 200-moving average of 120.82 as risk aversion dominating trades on top of closure of Shanghai and Hong Kong equity markets to celebrate the 70th anniversary of the end of World War II.
Asian currencies were closed broadly lower against US dollar. Top losers were the ringgit, rupiah and won. The rupiah fell 0.87% and the won down 0.75% against the US dollar on the back of continued equity-related outflows and weakening exports, which raised expectation of downward pressure on foreign exchange reserves. Slowest pace of South Korean’s economy growth in two years and the sharp fall in August exports also spurred speculations over interest rates cut by the Bank of Korea.
The ringgit fell 1.68% against the US dollar, reversing its weekly gains position of last week to be top loser among Asian currencies. Key drivers were strong rebound of cross Singapore dollar/ringgit from a low of 2.956 on Tuesday to trade above psychological handle of 3.00, the increase in five-year credit default swap from last week’s low of 162.96 to close above the 180.00 level and weakening macroeconomic data.
The PMI for manufacturing sector declined sharply to a 34-month low of 47.2 in August from 47.7 previously. Exports grew 3.5% in July compared with 5% in June, which translated in lower trade surplus of RM2.38bil against previous reading of RM7.98bil, another downward pressure amid declining foreign exchange reserves.
The one-month US dollar/ringgit volatility however holding steadily despite local equity markets dipped below critical 1,600 level. MSCI Malaysia price-to-book is only 12%-13% above the GFC low. This is the lowest that the MSCI Malaysia has hit since the global financial crisis.
The ECB held its policy rates steady but Draghi’s remarks were widely perceived to be dovish. Correspondingly, 10-year US Treasuries (UST) yield hit a low of 2.15% from high of 2.22% on Monday. On Friday’s 11.00am pricing, the two-, five- and 10-year UST traded at 0.69%, 1.47% and 2.15%.
M’sian bond market
Trading activities in local govvies were lighter this week as the ringgit resumed its depreciation path. Players adopt a wait and see strategy ahead of Bank Negara and US committee meetings.
Local govvies saw RM6.5bil trading volume, translating into daily average of RM2.2bil. This was lower compared with the preceding week’s total trading value of RM15bil, which is equivalent to RM3bil daily. On Friday’s 11.00am pricing, the three-, five-, seven-, 10-, 15-, 20- and 30-year benchmark Malaysian Government Securities yields settled at a respective 3.43%, 3.84%, 4.19%, 4.25%, 4.58%, 4.73% and 4.93%.
In the secondary private debt securties market, we saw a lower volume in trading activities this week compared with last week. Total trading volume for the week stood RM700mil, averaging RM242mil daily, compared with last week’s average of RM295mil. About 38% of the trading volume was contributed by the GG/AAA segment, 59% by the AA segment, with the remaining by the A segment.
In the GG/AAA segment, Korea Development Bank ‘02/16 increased 2 basis points to close at 3.94% with a total volume of RM10mil. The AAA rated, 2019-2027 tranches of PLUS bonds increased 25-37 basis points at 4.27%-4.86% with RM90mil done. Meanwhile, Woori Bank ‘02/16 saw yield decrease 5 basis points to settle at 4.11% with RM50mil changed hands.
Trading activities in the AA segment this week were lower compared with last week. CIMB Group Holdings Bhd ‘12/15 increased 1 basis point to close at 4.13% with a total trading volume of RM230mil. OCBC Bank (M) Bhd increased 14 basis points at 4.49% with a total trading volume of RM28mil. YTL Power International Bhd ‘10/24 increased 13 basis points to close at 4.9% with RM10mil done.
Ringgit IRS market
The interest rate swap (IRS) curve stayed relatively steady, compared with last week. The three-month KLIBOR kept unchanged at 3.73% this week.
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