Recap

• In September, global markets were volatile, driven by noises like geopolitical tension, trade war and economic data. Nonetheless, the MYR appreciated by 0.8% m/m at the end period in September to 4.187 while on a monthly average, the MYR strengthened by 0.1% m/m to 4.182.

• Geopolitical tension emerged sometime in mid-September following the drone attacks on Saudi Aramco’s oil refinery facilities. These disrupted crude oil supply with oil production dropping to 5.7mbpd from 11.3mbpd. As a result, oil prices spiked to US$69.02/bbl from US$60.38/bbl. During this period, the MYR weakened by 4.183 against the US dollar. However, the rise in oil price was short-lived with the restoration of Saudi’s oil production capacity back to 11.3mbpd — the level before the drone attacks on oil facilities. It provided comfort to the MYR against the USD, retracing back to 4.168.

• On the trade war side, positive developments took place between the US and China, leading to a global risk-on sentiment. China released a list of 16 American products that would be exempted from new tariffs until September 2020 while the US reciprocated with its own “gesture of good will” by delaying the 5% increase in tariffs (from 25% to 30%) on US$250bil Chinese imports originally scheduled on 1 October.

• On the monetary front, the US Fed surprised the market with a lack of a dovish tone during the FOMC meeting that took place on 18 September. The Fed voters were seen to be split on the need to further ease the monetary policy with a vote of 7 in favour of more easing against 2 otherwise. This was despite having reduced its benchmark policy rate by 25bps to 1.75–2.00% which fell within expectations.

• Meanwhile, the short-term funding market in US came under pressure, surpassing 10%. However, it subsided after the New York Fed started to inject liquidity, bringing down the overnight repo rate to now 3%. The Fed has scheduled to conduct repo operation for every business day until 10 October, with the option to pursue additional sales down the road, implying QE is on the cards.

• During the month, other central banks that reduced their policy rates were the European Central Bank (ECB), Reserve Bank of Australia (RBA), Bank Indonesia (BI) and Bangko Sentral ng Pilipinas (BSP). In the case of Bank Negara Malaysia (BNM), it decided to leave rates unchanged at 3.00% after a 25bps cut in May. Though BNM’s policy statement was cautious on growth, there was hardly any comments on the “downside risks”. In fact, BNM maintained the tone of “now subject to downside risks” due to uncertainties from the external and domestic environment, trade tension and low commodity prices, implying it intends to adopt a wait-and-see attitude and remains behind the rate cutting curve.

• Besides, on the local front, FTSE Russell left Malaysia in its Tier 2 status but will remain on its watch list in relation to the World Government Bond Index. The decision is seen positive in the near term with risk may be picking up closer to the next review in March 2020.

October Focus

• Looking ahead, we continue to believe the downside risks remain high. External noises such as trade tension, Brexit outcome by 31 October, slower-than-expected potential incoming macro data, corporate earnings, geopolitical risk and to some degree the impeachment of the US president’s story will continue to influence the global markets.

• On the monetary front, the focus will be on the US FOMC meeting scheduled on 30 October in which we expect another 25bps rate cut from the current 1.75%–2.00%. Also, the emphasis will be on US New York Fed liquidity injection to calm the overnight repo rate which ends on 10 October. Besides, the emphasis is on other central banks meetings during the month such as the ECB, RBA, BI, Bank of Japan (BoJ) and Reserve Bank of India (RBI).

• On the local front, domestic challenges are expected to influence the financial market. Focus will be on the coming 11 October Budget 2020 that should set the tone for the 12th Malaysia Plan, Shared Prosperity Vision 2030 and New Industrial Master Plan besides addressing the current economic issues and growth drivers. Also, the macro details such as growth target, inflation and fiscal deficit/GDP for 2020 will in focus, apart from revenue contribution and expenditure focus.

• Our MYR outlook for 2019 remains unchanged within the range of 4.15–4.23 against the USD. Our end period for the MYR is pegged at 4.19 against the USD.

Source: AmInvest Research - 8 Oct 2019