Treasury Pulse - Forex, Treasuries, Bonds, Equities

Treasury Pulse 9a

Global Forex Market

AMID a short working week in conjunction of President Day holiday, the US dollar was on a roller-coaster ride under the week review, appreciating 0.12% to 90.59 while trading between a high and low of 90.95 and 90.48, respectively.

The gains were broadly supported by upbeat economic data which reinforces expectations of rising inflation as well as the spike in US Treasury yields.

However, the US dollar witnessed a pullback towards the end of the week after early week expectations of quick economic recovery were tempered by disappointing weekly jobless claims data. Key economic data release includes:

(1) January retail sales accelerating 5.3% month-on-month (m-o-m) from -1.0% m-o-m in December (consensus: 1.1%);

(2) January manufacturing production edging higher by 1% m-o-m from 0.9% m-o-m in December (consensus: 0.7%);

(3) February NY Empire State Manufacturing Index jumping to 12.1 points from 3.5 points in January (consensus: 6); and

(4) Initial Jobless Claims adding 861,000 in the week ending Feb 13 compared to 848,000 in the week prior (consensus: 765,000).

Separately, the Federal Open Market Committee meeting minutes was released overnight – highlighting “participants observed that the economy was far from achieving the committee’s broad-based and inclusive goal of maximum employment”.

Bull momentum dominated the crude oil market with Brent rising 2.40% week-on-week (w-o-w) to US$63.93 per barrel – hovering at the highest level since January 2020. The gains were boosted by:

(1) freezing weather and winter storms in regions across the US as many oil wells were shut because water is produced along with oil and can freeze up equipment; as well as

(2) a sharp drop in US crude inventories for week ending Feb 12, as much as 7.26 million barrels per day (mbpd) from a supply cut of 6.64 mbpd in the prior week (consensus: -2.43 mbpd), as reported by the US Energy Information Administration.

The euro weakened by 0.23% to 1.209 – falling below the 1.21 mark for the first time since Feb 8 – resulting from the broad US dollar’s strength.

Nevertheless, the market also watched closely Italian PM Mario Draghi’s maiden speech as he said his broad-based administration would throw all its efforts to help rebuild the country following the coronavirus pandemic and promised to introduce sweeping reforms to revitalise the battered economy.

The pound came in as the outperformer in the G10 space, strengthening 0.91% to close just shy of the 1.40 mark, charting its highest level in three years. The bullish momentum was supported by:

(1) the speed of vaccine inoculation in the country, prompting investors to bet that the UK economy would normalise ahead of its peers; and

(2) dwindling expectations of negative interest rates.

Key economic data release includes January’s inflation print, which came in at 0.7% year-on-year (y-o-y) from 0.6% y-o-y in December (consensus: 0.6%) with prices of furniture and household goods, restaurants and hotels as well as transport the largest contributors.

Meanwhile, the core inflation remained at 1.4% y-o-y, unchanged from January (consensus: 1.3%).

The yen was under selling pressure, down 0.71% to 105.7 while briefly touching a four-month high at 106 due to widening interest rate differential between the US. Nevertheless, the data release for the week includes:

(1) Fourth-quarter 2020 preliminary GDP estimate which came in at 3% q-o-q from 5.3% q-o-q in third-quarter 2020 (consensus: 2.3%);

(2) January exports grew 6.4% y-o-y from 2% y-o-y in December (consensus: 6.6%); and

(3) December machinery orders rebounded 11.8% y-o-y from -11.3% y-o-y in November.

Majority of the Asia ex-Japan currency weakened against the US dollar except for the Taiwanese dollar (0.16% to 27.96) and rupee (0.14% to 72.65).

Much of the focus was on the rupiah, weakening 0.37% to 14,025 after Bank Indonesia slashed the benchmark policy rate by 25bps to a record low of 3.50%, in a bid to stimulate economic growth.

Meanwhile, the ringgit/US dollar pair lost its weekly gains, trading as low as 4.028 before closing the week at 4.043 (0.03%). Still, much of the focus was on:

(1) PM Tan Sri Muhyiddin Yassin’s announcement on Malaysia’s Covid-19 playbook with the implementation of the vaccination programme set to begin Feb 26; and

(2) Muhyiddin launching the MyDigital & Malaysia Digital Economy blueprint.

US Treasuries (UST) Market

The closely watched 10-year UST yield spiked 8.7 basis points (bps) to 1.30% – marking the highest in one-year – with the yield curve steepening as expectations of an extended fiscal and monetary stimulus alongside upbeat economic data release added momentum to the reflation trade.

The 10Y/2Y spread widened to 119bps – the highest since April 2017 – while the 30Y/5Y spread expanded to 153bps, the steepest since Oct 2015.

Separately, Treasury Secretary Janet Yellen said a large Covid relief package is still needed for a full recovery in the US. She added that a US$1.9 trillion stimulus deal could help the economy get back to full employment in a year.

As at noon yesterday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 0.10%, 0.55%, 1.29% and 2.07%, respectively.

Malaysian Bond Market

The bears remained in control in the local bond market as the blood bath extended for the third consecutive week.

The Malaysian Government Securities (MGS) yield curve rose 1.5-11bps at the front to the belly part of the curve while the back end added 5.5-21.5bps, tracking the movement on the UST curve added with the relaxation of EPF withdrawals through the i-Sinar programme.

The closely watched MGS 10Y hit an eight-month high at 3.00% midweek, before easing to 2.96% on Thursday.

Nevertheless, the midweek focus was on the reopening auction of the 20Y MGS ‘05/40 which garnered a strong bid-to-cover (BTC) of 2.224 times on the back of a total size amounting to RM4bil (RM2bil of issuance, including RM2bil of private placement).

The auction closed with a high/low of 4.010% and 3.901% while averaging at 3.969%.

As at noon yesterday, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 1.90%, 2.27%, 2.72%, 2.95%, 3.74%, 3.94% and 4.20%, respectively.

The govvies segment’s activities declined by 18% w-o-w to RM16.7bil from last week’s RM20.4bil. The MGS segment fell by 9% to RM9.8bil from RM10.8bil in the previous week.

The Government Investment Issue (GII) was seen decelerating around 28% to RM6.7bil from RM9.3bil. Meanwhile, the short-term bill’s (MTB/MITB) trading slipped 23% to RM170mil from RM220mil.

Secondary trade volume shaved off around 25% to RM1.7bil from RM2.3bil. The credit spread narrowed by 24bps on average across the curve.

The shorter end rose 13.6bps on average while both the belly and longer ends of the curve eased averagely by 52.7bps and 26.3bps, respectively.

Ringgit Interest Rate Swap (IRS) Market

The IRS was seen rising 1-12bps from the front until the back end of the curve. The 3-month Klibor stood at 1.94%. Elsewhere, the 5-year credit default swap (CDS) fell 12.6% w-o-w to 37.35bps.

Malaysian Equity Market

During the week (Feb 12–18,2021), the FBM KLCI slipped 23.58 points (pts) or 1.47% to 1,575.84 pts against a backdrop of a flattish MSCI Emerging Markets Index (-0.19%) and Dow Jones Industrial Average (+0.20%).

Globally, investors rotated out of technology names on concerns over their high valuations being untenable amidst a rapid rise in US Treasury yields.

This was offset by increased bets on cyclical sectors, particularly energy and financial, on recovery optimism underpinned by the vaccine rollout and fiscal stimulus.

Locally, the market sentiment was weighed down by the extension of the MCO 2.0 in Selangor, Kuala Lumpur, Johor and Penang to March 4,2021.

Foreign investors unloaded RM346.5mil worth of Malaysian equities during the week, pushing the year-to-date cumulative net outflow to RM1.1bil.

Local institutional and retail investors continued to dominate the market with a participation rate of 45.1% and 39.4% in February respectively (comparable to 44.9% and 38.1% in January respectively).

Foreign investors remained passive with a participation rate of 15.6% in February (compared with 17% in January).

Meanwhile, foreign investors piled onto MGS for the ninth straight month with a net inflow of RM2.3bil in January 2021 (versus RM2.4bil in December 2020). This was on the heels of a RM13.4bil net inflow in 2020.

Equity trading activities eased slightly with an average daily value traded (ADVT) of RM4.6bil in February, (versus RM5.0bil in January), while turnover velocity decreased to 64.1% in February (versus 70.0% in January).

During the week, 9 out of 13 sectors in Bursa Malaysia ended in the positive territory.

The best performing sector was Energy (+13.0%) on the back of buoyant oil prices amidst the cold snap in the US.

The worst performing sector was Financial Services (-1.6%) on concerns over the impact of the MCO extension on economic recovery.

In the coming week, investors will keep a close eye on:

> Eurozone CPI (January) on Feb 23;

> Malaysia CPI (January) on Feb 24;

> Malaysia PPI (January) on Feb 25;

> Malaysia trade statistics (January) on Feb 26;

> US Federal Budget on Feb 26.

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