Global Forex Market
THE dollar closed the week stronger, rising 0.20% to 91.86 – hovering at a one-week high propelled by higher UST yields – jumping to its highest level in more than a year as rising optimism faster US economic recovery amid fears of higher inflationary pressure overshadowed Federal Reserve’s dovish stance.
During the Fed FOMC meeting, Fed chair Powell reiterated his intent to keep an accommodative monetary policy, even while predicting a strong economy recovery and a jump in inflation above target.
The Fed projected the GDP to grow by 6.5% in 2021 (-3.5% in 2020) with core inflation at 2.2% (1.4% in 2020) and both GDP and core inflation growing by 3.3% and 2.0% in 2022. The headline inflation is projected at 2.4% in 2021 (1.2% in 2020) and 2.0% in 2022.
The divergence between the Fed’s guidance and market expectations sent the yields higher which attracted higher bids for the dollar.
Nevertheless, the central bank also left the policy rate unchanged at 0.00%–0.25% while maintaining its asset purchase programme of US$120bil (RM492bil) in bonds per month.
During the week under review, several events that complemented dollar’s strength include: (1) reports confirming that the Biden administration’s stimulus cheques have reached the eligible recipients’ bank accounts; (2) Philadelphia Fed Manufacturing Index for March surging to 51.8 – the highest since 1973 – versus 23.1 in February (cons: 23.0); and (3) February’s Producer Price Index jumping higher than expected by 2.8% y/y from 1.7% y/y in January (cons: 2.7% y/y).
Bearish momentum hit the crude oil market with the Brent plunging 8.58% w/w to US$63.28 per barrel owing to: (1) the rise in the dollar; (2) concerns about weaker demand in Europe amid a slowdown in vaccine programme as well as the reintroduction of tighter restrictions in several parts in the Europe; and (3) the EIA reporting higher US crude inventories at 2.4mbpd for the week ending 12 March, from 13.8mbpd in the previous week (cons: +3.0mbpd).
The euro depreciated by 0.32% to 1.192 weighed down by: (1) a stronger dollar; (2) renewed restrictions in several parts in Europe; and (3) rising concerns over suspended Covid-19 vaccines in major European nations, including Germany and France following concerns over reports of blood clots.The pound witnessed a rather volatile session, closing the week marginally higher by 0.01% to 1.393.
The pound initially garnered support following: (1) Britain’s dismissal of safety concerns over the AstraZeneca vaccine – complemented by statements from the European Medicines Agency, echoing other health bodies that there was no evidence that the vaccine was unsafe; and (2) early week hawkish-tilted comment from BoE’s Bailey, citing inflation is likely to pick up soon.
However, the gains were erased after a surprise dovish-tilted Bank of England’s (BoE) monetary policy statement, warning the outlook for Britain’s recovery remains unclear, dampening some speculation the bank would signal a more confident outlook. Nonetheless, the BoE kept its key interest rate at a record low of 0.10%.
During the week under review, the Japanese yen strengthened by 0.13% to 108.9 amidst the Bank of Japan (BoJ) keeping its negative interest rate unchanged at -0.10% and tweaked its monetary easing programme. The BoJ marginally expands the fluctuation in long-term rates for 10-year bonds and also said it would allow more flexibility in its stock purchases.
Asian ex-Japan currencies’ performance was rather mixed against the dollar. The South Korean won is the outperformer, appreciating 0.86% to 1,124, followed by the rupee (0.36% to 72.5), and the Singapore dollar (0.09% to 1.34).
Meanwhile, the Taiwanese dollar came in as the underperformer during the week, down 0.64% to 28.37. The ringgit strengthened 0.19% to 4.111 despite the plunging crude oil prices and UST yields shooting higher. Malaysia’s Covid-19 vaccination rate has shown steady progress so far with a total of 367,213 jabs administered since the start of the National Covid-19 Immunisation Programme on Feb 24 up to Mar 17.
Mid-week, PM Tan Sri Muhyiddin Yassin unveiled stimulus measures i.e. Pemerkasa worth RM20bil. This marks the sixth stimulus package since the start of the Covid-19 pandemic, bringing the total stimulus to RM340bil (24% of GDP).
US Treasuries (UST) Market
Selling pressure in the US Treasury segment intensified as the segment added 0.2–10.3bps across the curve. The closely watched 10-year UST yield spiked around 10.3bps to 1.71%, marking its highest in one year. The selling wave came after bond investors rebelled against Fed Powell’s dovish monetary stance as brewing expectations for a vaccine and government stimulus worth US$1.9 trillion could fuel economy recovery much faster than expected.
Investors view that this may lead to significant inflationary pressure and could eventually force the Fed to lift short-term interest rates. The 10Y/2Y spread widened to 155bps – the highest in four years, while the 30Y/5Y spread expanded to 158bps. As of noon Friday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 0.16%, 0.86%, 1.71% and 2.46%, respectively
Malaysian Bond Market
The MGS curve bear flattened, averaging at +0.9bps across the curve, tracking the UST yields amid the revision in official fiscal deficit target in 2021 to -6.0% of GDP from initial forecast of -5.4% after the announcement of additional stimulus package.
The Pemerkasa stimulus package, worth RM20bil, includes a direct fiscal injection of RM11bil while the remaining RM9bil are non-fiscal measures.
Nevertheless, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz reaffirmed that the country’s statutory debt is expected to 58.4% of GDP in 2021 from 58% in 2020, which still falls below the 60% debt ceiling. As at noon Friday, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 2.12%, 2.76%, 3.19%, 3.47%, 4.02%, 4.35% and 4.48%, respectively.
The govvies segment’s activities declined by 47% w/w to RM11.1bil from last week’s RM21.0bil. The MGS segment shrank by 55% to RM5.8bil from RM12.8bil in the previous week. The GII was seen decelerating around 34% to RM4.7bil from RM7.1bil. Meanwhile, the short-term bill’s (MTB/MITB) trading plunged to RM583mil from RM1.0bil.
Secondary trade volume slipped 26% to RM1.4bil from RM1.8bil. The credit spread widened by 7.9bps on average across the curve. The shorter end rose 23.7bps on average while the longer end of the curve climbed 14.7bps averagely. In contrast, the belly side of the curve eased 16.0bps on the average
.Ringgit Interest Rate Swap (IRS) Market
The IRS was seen easing by 1.5bps on average. The 3-month KLIBOR stood at 1.94%. Elsewhere, the 5-year CDS slid 7.2% w/w to 39.53bps.
Malaysian Equity Market
During the week (March 12–19,2021, midday), the FBM KLCI fell 7.95 points or 0.49% to 1,621.46 points, in line with the pullback in the MSCI Emerging Markets Index (-0.76%). Both indices underperformed the Dow Jones Industrial Average (+1.16%).
Globally, investors sold off richly priced tech names on the back of the rapidly rising US bond yields. Similarly, energy stocks were hit by a pullback in crude oil prices on expectations of Opec+ easing its production restraint in the coming months.
These were offset by investors’ healthy appetite for cyclical sectors, particularly, financial on reflation trade, and the Fed’s steadfast accommodative monetary policy stance despite the upgrade in its growth and inflation forecasts for the US. Locally, investors reacted mildly to the new RM20bil Pemerkasa stimulus package.
Foreign investors unloaded RM49.0mil worth of Malaysian equities during the week, pushing the ytd cumulative net outflow to RM1.1bil. Local institutional and retail investors continued to dominate the market with a participation rate of 44.2% and 40.0% in March respectively (comparable to 44.3% and 39.3% in February respectively). Foreign investors remained passive with a participation rate of 15.8% in March (compared with 16.3% in February).
Meanwhile, foreign investors piled into Malaysia Government Securities (MGS) for the 10th straight month with a net inflow of RM3.5bil in February 2021 (vs RM2.3bil in January 2021). This was on the heels of a RM13.4bil net inflow in 2020.
Equity trading activities improved with an average daily value traded (ADVT) of RM5.7bil in March vs. RM5.2bil in February. Similarly, turnover velocity rose to 77.5% in March vs. 71.9% in February.
During the week, five out of 13 sectors in Bursa Malaysia ended in the positive territory. The best performer was the Industrial Products and Services Index (+0.9%) on recovery optimism. The worst performing sector was Energy (-2.7%), weighed down by a slump in oil prices.
In the coming week, investors will keep a close eye on:> US existing home sales (February) on March 22
> Japan monetary policy meeting on March 23
> Malaysia CPI (Feb) on March 24
> Eurozone manufacturing PMI on March 24
> Eurozone economic bulletin on
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