THE US dollar depreciated 0.1% to 98.309 following improving trade discussions between China and the United States, encouraging investors to flock to risk assets. On Wednesday, Beijing released a list of 16 American products that would be exempted from new tariffs until September 2020. Subsequently, President Donald Trump reciprocated with his own “gesture of goodwill” by delaying the 5% increase in tariffs (from 25% to 30%) on US$250bil Chinese imports originally scheduled on Oct 1.
Meanwhile, economic data released during the week includes: (1) NFIB business optimism index that slipped slightly to 103.1 in August from 104.7 in July; (2) headline inflation eased to 1.7% year-on-year (y-o-y) in August from 1.8% y/y in July (cons: 1.8%) although core inflation edged higher to 2.4% y-o-y in August from July’s 2.2% y-o-y (cons: 2.3%); and (3) producer price unexpectedly rose by 1.8% y-o-y from 1.7% y-o-y in July (cons: 1.7%) coupled with the core producer price that surged 2.3% y-o-y in August from 2.1% in July (cons: 2.2%).
Brent crude oil fell 1.9% to US$60.38/bbl after: (1) Washington discussed to ease sanctions on Tehran in order to reopen negotiations; and (2) the Opec+ alliance meeting wrapped up without conclusion on deepening crude supply cuts. Market players were still waiting for the Opec+ alliance meeting in Vienna this December.
The euro strengthened 0.3% to 1.107 owing to a less dovish ECB monetary meeting. The ECB slashed its main deposit rate by 10bps as expected to a record a low at -0.50% alongside restarting its asset purchase programme at a monthly volume of €20bil beginning November and continuing the programme as long as necessary.
The ECB also strengthened its forward guidance by saying rates are expected to remain at their present or lower levels; moving to a two-tiered reserve system to support the bank-based transmission of monetary policy and easing the terms of the targeted longer term refinancing operations by lowering the minimum borrowing rate offered to as low as the deposit rate while extending the maturity from two to three years.
The British pound rose 0.4% at 1.234 on the back of easing fears that the country could fall into recession supported by economic data: (1) GDP grew faster by 0.3% m/m in July (June: 0%, cons: 0.1%) helped by the dominant services sector; (2) improving manufacturing production by -0.6% y-o-y in July compared with -1.4% y-o-y in June (cons: -1.1%); (3) positive labour market data – the unemployment rate fell to 3.8% in July from 3.9% in June (cons: 3.9%), earnings excluding bonuses grew 3.8% y-o-y in the May to July period (3-month average). Including bonuses, wages rose 4% y-o-y from 3.8% y-o-y in the same period.
On the Brexit front, Prime Minister Boris Johnson lost a second bid to hold a snap election, making it more likely that he will have to ask the EU for an extension to the Brexit deadline. The parliament suspension also was deemed unlawful, prompting immediate calls for lawmakers to return to work as the government and parliament battle over the future of Brexit.
The yen shaved off 1.1% at 108.1 on the back of rising risk-on sentiment in global markets. Besides, the yen was partly weighed down due to Japan’s machinery orders falling 6.6% m-o-m in July (June: 13.9%, cons: -9.9%) as slowing global demand and prolonged trade tussle hit corporate investment. Nonetheless, the economy grew as expected by 0.3% q-o-q in 2Q2019 from 0.5% in 1Q2019.
The majority of the Asian ex-Japan currencies strengthened against the dollar save for the peso, which was down 0.08% to 51.9. Meanwhile, the Indian rupee came in as the best performer, up 0.82% to 71.1, followed by the rupiah, appreciating by 0.76% to 13,994 partly due to weaker crude oil price. The yuan rose 0.52% to 7.079 as Beijing showed goodwill gesture, exempting 16 types of US products from Chinese tariffs.
The ringgit (MYR) appreciated by 0.34% to 4.166 owing to risk-on sentiment as Bank Negara kept the overnight policy rate (OPR) unchanged at 3.00%.
While the overall tone of the MPC meeting was less dovish, Bank Negara remained cautious on growth. Meanwhile, the FBM KLCI fell 0.2% to 1,601 dragged down by a selloff in Axiata and Digi after merger talks fell through. However, the local bourse recorded a net foreign inflow of RM167mil. Economic release for the week includes: (1) July industrial production unexpectedly slowing down to 1.2% y-o-y from 3.9% y-o-y in June (cons: 3.5%); and (2) retail sales grew albeit at a slower pace of 7.1% y-o-y in July from 7.7% y-o-y in June.
US Treasuries (UST) Market
US Treasuries witnessed a sell-off, adding 13bps on average across the spectrum due to risk-on sentiment after the US and China showed a gesture of good will ahead of their planned trade talks – encouraging investors to dump safe papers.
Apart from that, the sell-off was partly supported by stronger-than-expected core-inflation data, up 2.4% y-o-y in August from July’s 2.2% y-o-y (cons: 2.3%), signalling other parts of the economy are holding well despite the downturn in the manufacturing sector. As at Friday, the 2-, 5-, 10- and 30- year benchmark UST yields stood at 1.72%, 1.64%, 1.78% and 2.26%, respectively.
Malaysian Bond Market
Focus of the week was on Bank Negara’s monetary policy meeting. While it was in line with most expectations, some were disappointed as a cut was expected. Bank Negara remained cautious on the growth outlook while the overall tone was less dovish as compared with other central banks globally which have adopted an easier policy.
Post-OPR meeting, the onshore IRS rose 5-6bps across the curve but we saw buying flows at the back of the curve.
By the end of the week, the MGS curve bull steepened with the 3-year tenure falling 4.0bps while the back end of the curve eased 1–2bps. At point of writing, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 3.09%, 3.24%, 3.30%, 3.33%, 3.52%, 3.63% and 3.85% respectively.
Local govvies activities surged 11% to RM13.0bil from last week’s RM11.7bil. Matching the pace, the MGS papers traded higher by 24% w/w to RM9.5bil from RM7.7bil, recording 73% of the total volume. Interest in the GII, however, dropped 22% to RM2.9bil from RM3.7bil, occupying 23% of the week’s flows. MTB/MITB rose 121% to RM553mil from RM250mil in the prior week. On another note, the secondary market declined 24% w/w to RM1.8bil from RM2.4bil a week earlier.
The GG/AAA segment contributed 73% of the flows while the AA-segment constituted 25% and the A-paper 2%.
DanaInfra Nasional Bhd 2026-2049 tranches gobbled up RM415mil, trading between 3.391% and 3.975%. Perbadanan Tabung Pendidikan Tinggi 2024-2032 papers gathered RM260mil with yields closing 3.32%-3.56%.
These were followed by Prasarana Malaysia Bhd 2026-2036 tranches which traded between 3.378% and 3.719%, on the back of RM230mil.
Meanwhile in the AA-segment, Jimah East Power Sdn Bhd 2027-2032 IMTN topped the list with RM260mil changing hands at 3.947%-4.229%. Next, 2021-2025 UEM Sunrise Bhd IMTN papers gathered RM102.5mil, trading between 3.636% and 3.881%. Last but not least were 2023-2026 WCT Holdings Bhd tranches which were traded at 4.448%-5.159% amounting to RM91mil.
MYR Interest Rate Swap (IRS) Market
The IRS was seen climbing across the curve with the 5-year rising the most at 8.5bps. The three-month Klibor lost 1bps to 3.39%. Elsewhere, the five-year CDS eased 4.6% to 43.4bps.
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