THE US dollar edged higher over the week, up 0.48% to 96.1 largely due to a sharp weakening in the euro. Meanwhile, the US government shutdown has stretched to 27 days as both President Trump and the Democrats remained unwilling to back off from their stands over the border wall funding. The concerns on the continued shutdown have weighed slightly on the dollar.
By the end of the week, the dollar gradually lost momentum following speculations that the US government may consider easing tariffs on China, paving the way for investors to flock to risk assets. Meanwhile, data releases were rather limited for the week with only the Philadelphia Fed manufacturing data, which rose to 17 in January from 9.4 in December, while December’s Producer Price Index fell 0.2% month-on-month (m-o-m) from 0.1% m-o-m in November.
In the commodities space, Brent jumped 2% to US$61.56 per barrel due to lower production and better prospects of trade talks after Trump’s administration was reported to have re-evaluated its tariff against China. At the same time, Opec reported that production was down by 751,000 barrels per day in December, with Saudi Arabia accounting for 468,000 barrels per day. Also, the spot price was supported by a bigger drawdown from US crude inventories of 2.68 million barrels instead of the consensus’ 1.50 million barrels reported by the Energy Information Administration.
The euro fell 0.7% to 1.140 after European Central Bank president Draghi raised concerns over the slower-than-expected growth in the eurozone. The EU industrial production continued its negative trajectory, which saw a contraction of 1.7% m-o-m from a 0.1% m-o-m expansion in the prior month. It was the sharpest monthly decline in 23 months.
Moreover, Germany narrowly escaped from a technical recession during the week as the 2018 GDP slowed down to a 5-year low of 1.5% year-on-year (y-o-y) from 2.2% y-o-y in the year before. Meanwhile, the trade surplus narrowed to €19bil in November from €23.4bil in October due to higher imports, which saw a 4.7% m-o-m increase over the 1.9% m-o-m rise in exports over the same period.
The pound surged 0.95% to 1.299 against the dollar despite the Brexit deal failing to pass through parliament. The rally started as the market gradually priced in a lower likelihood for a no-deal Brexit. The proposed Brexit deal, which fell apart, suffered a margin of 230 MPs as only 202 lawmakers agreed to the deal. It was the heaviest defeat that the UK government has ever suffered in a century. Besides, a failed no-confidence vote on Prime Minister May has eased the situation as well, which furthered the rally.
Meanwhile, only inflation data in December was released which saw it decelerating to 2.1% y-o-y, the lowest since January 2017, from 2.3% y-o-y the month earlier. On the other hand, core inflation rate rose to 1.9% y-o-y in December from last month’s 1.8% y-o-y and beating the expectation of 1.8% y-o-y.
The Japanese yen plunged 1.02% to 109.3 largely on the back of disappointing economic release. The machinery orders index stayed unchanged after a 7.9% m-o-m jump in the previous month while the market expected a 3.5% m-o-m increase. It was mainly due to a sharp contraction in food and beverage as it fell 44.1% m-o-m from a 170.6% m-o-m rise in the previous period.
Furthermore, the headline inflation rate in December skidded for the second consecutive month to 0.3% y-o-y compared with 0.8% y-o-y in November. As such, 2018 headline inflation averaged 1% y-o-y, higher compared with 2017’s 0.5% y-o-y but still far from Bank of Japan’s 2% target.
The Asia ex-Japan basket generally closed lower against the dollar. The Indonesian rupiah posted the biggest lost, down 0.47% to 14,192 amid Bank Indonesia’s move to leave its policy rate unchanged at 6%. The Indian rupee weakened 0.15% to 71.0 as the crude oil price started to pick up some momentum. Besides, the Chinese yuan tracked its regional peers, slipping 0.12% to 6.776 for this week as exports shrank 4.4% y-o-y in December from a 3% y-o-y growth in the prior month. However, the Thai baht strengthened 0.57% to 31.7.
The ringgit softened 0.30% to 4.114 against the stronger dollar. However, the FBM KLCI managed to close higher by 0.4% to 1,683, moving in tandem with its regional peers while foreign funds recorded an inflow of RM231mil this week. The influx of fund flows was a result of an overall improvement in market sentiment. On the data front, the November unemployment rate remained low at 3.3% y-o-y.
US Treasuries (UST) Market
The political deadlock in the US pushed the government shutdown towards a full month with no sight of progress on the situation. Besides, the White House seems to soften the tone on tariffs as a way to calm the beaten global market. Despite seeing the demand for safe haven fading for a short while, it re-emerged after the failed Brexit vote spook the market.
The UST 10/2 spread slightly widened to 17.9 basis points (bps) on a broad agreement among the Fed officials that the risk for inflation to overshoot is very unlikely. As at yesterday, the 2-, 5- and 10-year benchmark UST yields stood at 2.57%, 2.57% and 2.75%, respectively.
Malaysian Bond Market
The fixed-income market saw a quarter less volume amid a risk-off sentiment. Meanwhile, there was a new 7-year Malaysian Government Securities (MGS) auction during the week. The RM3.5bil issuance closed with a strong bid-to-cover of 2.216 times and averaged at 3.906%. Furthermore, the IRS 3-year was traded below Klibor 3M levels, following speculations of a potential dovish Bank Negara during its upcoming monetary policy committee meeting. As at yesterday afternoon, the 3-, 5- ,7- ,10- ,15- ,20- and 30-year benchmark MGS yield settled at 3.56%, 3.73%, 3.89%, 4.06%, 4.39%, 4.56% and 4.78%, respectively.
In the domestic exchange-traded fund (ETF) space, we have the Markit iBoxx ABF Malaysia Bond Index, an index comprising MGS, Government Investment Issue (GII) and GG, returning 0.225% in the week from Jan 11, 2018 to Jan 17, 2019 as the index yield fell to 4.04% from 4.07%. In the same period, the ABF MALAYSIA BOND INDEX FUND, an ETF which tracks the index, posted a 0.252% jump in net asset value as the fund yield slid to 4.02% from 4.05%.
The total volume for the private debt securities segment dived 36.6% to RM2.86bil from last week’s RM4.51bil. The GG/AAA segment was mostly traded as it attributed about 34.9% of this week’s trade with the AA and A segments contributing 28.3% and 34.2%, respectively.
In the GG/AAA segment, flows were focused on Danga Capital Bhd’s 2027-2033 Islamic medium-term notes (IMTN), which saw RM290mil changing hands in the range of 4.457%–4.769%. 2019-2020 Cagamas MBS Bhd tranches traded between 3.886% and 4.148% on the back of RM183mil. Next, Prasana Malaysia Bhd’s 2024-2033 issuances attracted RM160mil with yields between 4.100% and 4.618%.
Ringgit Interest Rate Swap Market
As at yesterday noon pricing, the 3-month Klibor stood at 3.69%. Elsewhere, the 5-year credit default swap dropped 6.5% to 91.3.
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