Global Forex Market
AMID a truncated week – welcoming a new year and a new decade – the US dollar weakened by 0.08% to 96.846. The drag in the dollar was fuelled by global risk-on sentiment following optimistic trade developments after President Donald Trump tweeted that “phase one” trade deal with China will be signed on Jan 15 at the White House and he will also go to Beijing for negotiations on a “phase two”.
As a result, investors pile on risk assets with the Dow and S&P 500 closing at a record high at 28,869 and 3,258, respectively, by the end of the week. The dollar, however, managed to regain some traction mid-week after economic data continued to perform better than its G4 peers.
December’s Markit Manufacturing PMI continued to expand albeit at a softer pace of 52.4 from 52.6 in November (consensus: 52.5) while initial jobless claims continued to trend lower to 222,000 as of Dec 28, 2019 compared to 224,000 in the week prior (consensus: 225,000).
Brent crude price lost 2.80% at US$66.25 per barrel despite signs of better US-China trade relations, ongoing tensions in the Middle East and larger-than-expected crude inventories cut by 5.5 million barrels for the week ending Dec 20.
With the new year’s arrival, this marked the scheduled start of lower crude oil production as Opec+ will cut a further 500,000 barrels per day (bpd) from Jan 1, on top of its previous cut of 1.2 million bpd.
The euro weakened by 0.04% to 1.117 largely due to poor December Manufacturing PMI which showed manufacturing jobs activities deteriorated to 46.3 compared to 46.9 in November (consensus: 45.9). This marked 11 straight months of contraction in the bloc despite easing concerns over Brexit and trade war.
The poor manufacturing activities were mainly seen in Germany (Dec: 43.7; Nov: 44.1), the Netherlands (Dec: 48.3; Nov: 49.6), and Italy (Dec: 46.2; Nov: 47.6).
The pound appreciated by 0.51% to 1.315 owing to a weaker dollar, added with growing speculation that the pound may set to rally in 2020 as players are pricing in positive Brexit developments. However, the gains in pound were capped by poor manufacturing index that came in lower than expected at 47.5 in December (Nov: 48.9, consensus: 47.6).
Amid a short working week for the Japanese market due to the new year and two-day bank holiday, the yen appreciated by 0.79% to 108.6. The strength was largely driven by a subdued dollar’s strength amidst thin liquidity.
The majority of Asia ex-Japan currencies appreciated against the softer dollar in view of positive trade developments save for the peso, baht and rupee. The Chinese yuan gained 0.45% to 6.964 as the market cheered following positive developments which include: December NBS Manufacturing PMI remaining unchanged at 50.2, December Caixin Manufacturing PMI continuing to expand albeit at a softer pace of 51.5 from 51.8 in November; and People’s Bank of China slashing its reserve requirement ratio by 50 basis points (bps) to 12.5% for big banks, effective Jan 6. The cut is expected to release around 800 billion yuan into the economy.
Riding on the back of a weaker dollar, the ringgit strengthened 0.93% to 4.089. Key economic releases during the week include Markit’s December manufacturing PMI that climbed to 50.0 – a 15-month high – from 49.5 in November; and November’s external trade – exports shrank 5.5% year-on-year (y-o-y) (Oct: -6.7% y-o-y, consensus: -4.4% y-o-y) while imports contracted 3.6% y-o-y (Oct: -8.7% y-o-y, consensus: -5% y-o-y). Looking at the stock market, the FBM KLCI slipped 0.50% to 1,603 while foreigners turned net sellers with a large net outflow of RM138mil. Overall, the local currency has appreciated by 1.03% to end the year at 4.091 versus 4.134 at the start of 2019.
US Treasuries (UST) Market
Optimism on the US-China trade deal resulted in further steeping of the treasury yield curve with the 10Y/2Y spread trading at around 34bps, the highest level since October 2018. A steeper curve suggest growing expectations of a stronger economic growth and inflationary pressures. Liquidity was nevertheless thin with trades largely dominated by year-end portfolio rebalancing flows.
However, buying momentum reemerged mid-week after market players concluded that the overall global manufacturing sector remained in a doldrums as December’s global manufacturing PMI eased slightly to 50.1 from 50.3 in November.
The survey highlighted that order books remained tepid while both intermediate and investment goods continued to deteriorate. As at yesterday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 1.57%, 1.67%, 1.88% and 2.33%, respectively.
Malaysian Bond Market
Amidst thin liquidity, the Malaysian Government Securities (MGS) yield curve eased 1–3bps across the curve save for the 30-year tenure that remained unchanged. Meanwhile, the Government Investment Issue (GII) curve fell 1.5–5.0bps across the curve.
Buying interest was mainly seen in the benchmark stocks, partly supported by global risk-on sentiment amidst tracking the strengthening ringgit against the US dollar, which broke the key 4.10 support level.
At the point of writing, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 2.98%, 3.18%, 3.30%, 3.30%, 3.55%, 3.72% and 4.07%, respectively.
The Markit iBoxx ABF Malaysia Bond Index, an index comprising of MGS, GII and Government Guaranteed (GG), returned 0.284% in the week from Dec 26, 2019 to Jan 2, 2020 as the index yield fell from 3.46% to 3.45%. In the same period, the ABF MALAYSIA BOND INDEX FUND, an exchange-traded fund which tracks the index, returned 0.283% as the fund yield were also fell from 3.44% to 3.42%.
Trading volume in the secondary local govvies segment shot up 141% week-on-week (w-o-w) to RM6.5bil from last week’s RM2.7bil, in particular on the first trading day of 2020 as market players returned from a long break.
Matching the pace, the MGS segment traded higher by 154% w-o-w to RM3.3bil from RM1.3bil, recording 51% of the total volume.
Likewise, interests in the GII papers also surged by 138% w-o-w to RM3.1bil from RM1.3bil occupying 48% of the week’s flows. MTB/MITB trading activities dropped 15% to RM70mil from RM82mil in the prior week.
On another note, the secondary market slipped 11% w-o-w to RM1.0bil from RM1.2bil a week earlier. The GG/AAA segment contributed 68% of the flows while the AA-segment constituted 32% and the A-papers attributed to less than 1%.
In the GG/AAA segment, DanaInfra Nasional Bhd 2023–2048 Islamic medium-term notes (IMTNs) dominated the list with RM359mil, trading between 3.229% and 4.258%. These were followed by 2028–2031 Bakun Hydro Power Generation Sdn Bhd tranches which accumulated RM90mil at 3.570%–3.880%. Besides, MKD Kencana Sdn Bhd ‘10/32 paper gathered RM50mil with yield closing at 3.751%.
Meanwhile, in the AA segment, IJM Corp Bhd ‘04/20 issuance gobbled up RM55mil, changing hands at 3.371%. Next, ‘07/29 PUBLIC BANK BHD gathered RM50mil, trading at 3.689%. Last but not least were Southern Power Generation Sdn Bhd 2029–2034 IMTNs, which traded between 3.998% and 4.349% amounting to RM40mil.
Ringgit Interest Rate Swap (IRS) Market
The IRS was seen adding 1–3bps across the curve. The 3-month Klibor stood firm at 3.35%. Elsewhere, the 5-year credit default swap eased 2.5% to 34bps.
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