THE US dollar depreciated by 0.49% to 97.60 due to resurgent coronavirus infections in the US, and the prospect of improving growth abroad, souring investors’ appeal on the dollar.
Nevertheless, the key economic release this week includes: (1) ISM non-manufacturing PMI accelerating to 57.1 in June from 45.4 in May (consensus: 50.1) – the highest since February before the coronavirus crisis; (2) July IBD/TIPP Economic Optimism easing to 44 from 47 in June; and (3) initial jobless claims lower at 1.4 million as of July 4 from 1.5 million in the week prior.
Brent crude price shaved off 1.05% to US$42.35 per barrel following: (1) the surprise oil inventories build-up at 5.7 million barrels for the week ending July 3 from supply cuts of 7.2 million in the previous week (consensus: -3.1 million); (2) the resurgence of Covid-19 cases; and (3) concerns over several US states re-imposing coronavirus lockdowns which outweighed signs of a recovery.
The euro appreciated by 0.33% to 1.13 largely underpinned by a weaker dollar. However, gains were capped due to the bearish European Commission (EC) Summer 2020 Economic forecast. The EC further downgraded the EU economy to a contraction of 8.3% in 2020, compared to 7.4% previously before expanding around 5.8% in 2021.
The pound surged by 0.99% to 1.26 after British Finance Minister Rishi Sunak unveiled a recovery plan, pledging £30bil (US$37.7bil) to head off an unemployment crisis by paying companies to bring back furloughed workers and cutting taxes for hospitality firms and homebuyers.
The Japanese yen rose 0.29% to 107.2 supported by: (1) the better June’s Eco Watchers Survey Current at 38.8 from 15.5 in May; and (2) machinery orders in May that rebounded 1.7% month-on-month (m-o-m) from -12% m-o-m in April (consensus: -5.4% m/m).
The majority of Asia ex-Japan (AxJ) currencies climbed against the dollar. The offshore yuan topped the list, rising 1.02% to 6.994 supported by the government’s optimistic economic outlook, followed by the Indonesian rupiah that picked up 0.88% to 14,395. In contrast, the Indian rupee weakened 0.47% to 74.995 on the back of higher bids for the Reserve Bank of India to slash 50 basis points (bps) by fourth quarter 2020, dragged by the falling inflation.
In the local space, the ringgit edged up 0.58% to 4.263 following both industrial production and distributive sales improving slightly, albeit still falling by double digits for the second straight month in May at -22.1% year-on-year (y-o-y) and -23.8% y-o-y from -32% y-o-y and -37.1% y-o-y, respectively in April.
US Treasuries (UST) Market
THE US Treasury curve bull flattened, seeing the longer tenures (10Y to 30Y) falling faster at 6.2bps–12.6bps while the short-term papers eased 0.6bps–1.9bps.
Risk-off sentiment was supported by: (1) concerns on the rising coronavirus cases in the US and some parts of the EU; and (2) Fed officials’ remarks that foresee the current situation as a threat to the economic recovery.
Auctions for this week witnessed the 3- and 10-year note yields awarded at 0.190% and 0.653%, respectively with bid-to-cover (BTC) ratios at 2.44 and 2.62 times. As at noon yesterday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 0.14%, 0.27%, 0.59% and 1.28%, respectively.
Malaysian Bond Market
RAPID bond buying was seen across the Malaysian Government Securities (MGS) and Government Investment Issue (GII) segments, easing around 17bps and 19.6bps, respectively. Intense demand came after Bank Negara’s Monetary Policy Committee (MPC) meeting in which the central bank delivered another 25bps rate cut as expected.
The OPR now stands at 1.75% – the lowest since the rate was introduced in 2004. Remarks from the MPC meeting were deemed dovish with Bank Negara leaving the door open for further rate cuts and remained data dependent.
Additionally, the reissuance of the 3Y MGS maturing on March 2023 garnered an exceptionally strong BTC of 2.512 times on the back of a total size of RM5bil with no private placement.
The auction closed with a high/low of 2.010% and 1.987% while averaging at 2.002%. As at noon yesterday, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 2.01%, 2.18%, 2.42%, 2.64%, 3.16%, 3.41% and 3.79%, respectively.
Activities in the govvies segment declined 4% week-on-week (w-o-w) to RM29.5bil from last week’s RM30.8bil. The MGS segment rose 2% w-o-w to RM17.1bil from RM16.7bil in the previous week. In contrast, the GII shrank 6% to RM10.7bil from RM11.3bil. Meanwhile, trading on the short-term bills (MTB/MITB) was reduced by 35% w-o-w to RM1.7bil from RM2.7bil.
In the GG/AAA segment, DanaInfra Nasional Bhd 2022–2038 tranches dominated the list with a total of RM810mil, trading between 2.33% and 3.62%. Meanwhile, in the AA segment, some interest was seen in YTL Corp Bhd 2023–2026 medium-term notes which gathered RM140mil at 3.27%–3.15%.
Ringgit Interest Rate Swap (IRS) Market
THE IRS was seen falling around 15–25.5bps across the curve. The 3-month Klibor eased 25bps to 2.03%. Elsewhere, the 5-year credit default swap slid 0.4% w-o-w to 66.45bps.
Malaysian Equity Market
DURING the week (July 3–9), the FBM KLCI climbed 46.97 points (pts) or 3.06% to 1583.25 pts, in line with the rally in the MSCI Emerging Markets Index that surged 5.47%, while the Dow Jones Industrial Average eased 0.47%. Investors may be reacting to the worsening Covid-19 pandemic in the US while other parts of the world were already well underway on the recovery path.
The US markets were caught in a tug-of-war between upbeat economic data (such as June 2020 non-farm payrolls) and rising Covid-19 cases, especially in California and Florida, that may lead to another round of lockdowns.
Nonetheless, foreign investors remained net sellers in the local market. For the week, foreign investors sold a total of RM200mil worth of Malaysian equities, bringing the year-to-date (YTD) net outflow to RM16.7bil.
The foreign selling was well absorbed by local institutional and retail investors, with a participation rate in July of 48.4% (versus 47.8% in June) and 38% (versus 37% in June) respectively. As foreign investors stayed passive, their participation rate in July fell to 13.6% (versus 15.2% in June).
Meanwhile, foreign investors piled into MGS with a net inflow of RM7.8bil in June 2020, up significantly from a net inflow of RM1.9bil in May 2020. However, YTD, foreign investors remained net sellers of MGS with a total net outflow of RM7bil.
Trading activities eased slightly with average daily value traded sliding to RM4.3bil in July (versus RM4.6bil in June) while turnover velocity slowed down to 59.5% in July (versus 70.9% in June).
Over the week, 11 out of 13 sectors in Bursa Malaysia ended in the positive territory.
The top performing sector was healthcare (+17.9%) driven by strong prospects of producers of personal protective equipment, including gloves, on the worsening pandemic situation in the US.
The worst performing sector was construction (-0.6%) as players struggled to ramp up construction activities under a new operating environment mandating various standard operating procedures and social distancing.
In the coming week, investors will keep a close eye on:
US Consumer Price Index (June) on July 14;
> Bank of Japan’s interest rate decision on July 15;
> China’s gross domestic product (second quarter) on July 16;
> European Central Bank’s interest rate decision on July 16; and
> US core retail sales (June) on July 16.
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