Snapshot Summary…

Global FX: The USD retreated, benefitting other major currencies

Global Rates: Sell-off was seen in the UST market, in tandem with weak performance in both Bund and Gilt curve

MYR Bonds: The MGS market reacted mutely towards the tabling of Budget 2024

USD/MYR: The ringgit depreciated to approach 4.74-level amidst geopolitical tension

Macro News

Euro Area: The Euro Area recorded a trade surplus of EUR6.7 billion in August 2023, a significant shift from the EUR54.4 billion deficit reported in the same month of the previous year. This transformation resulted from a substantial 24.6% decrease in imports to EUR214.9 billion, while exports saw a milder decline of 3.9% to EUR221.6 billion.

China: The People's Bank of China (PBoC) injected a total of CNY789 billion into the banking system through a one-year medium-term lending facility (MLF) on Monday, while maintaining the interest rate at 2.50%. This operation was aimed to address CNY500 billion of expiring MLF loans this month, resulting in a net fresh fund injection of CNY289 billion into the banking system. This marked the largest medium-term liquidity injection since 2020.

Japan: Industrial production in Japan declined by 0.7% m/m in August 2023, which contrasts with the flat reading in a preliminary figure and follows a 1.8% decrease in the previous month. This marks the second consecutive month of declining industrial output and the fourth contraction since the beginning of the year.

Malaysia: The Malaysian government anticipates generating an extra MYR3billion in revenue by raising the service tax from its current rate of 6% to 8% next year. While the newly announced Budget 2024 did not mention the goods and services tax (GST), the Treasury Secretary General clarified that the possibility of reintroducing the broad based consumption tax, GST, remains a consideration for the government.

Fixed Income

Global bonds: Treasuries were sold off overnight despite slight dovish tinge communicated by Philadelphia Fed Patrick Harker (voting member). He said that the Fed should not create new pressure on the economy by increasing borrowing costs and believed that the central bank is done raising interest rates as inflation pressure is already abating. Meanwhile, investors continue to assess the conflict in the Middle East. The UST 10Y rose 9 bps to close at 4.71%. Focus will be on US retail sales data later tonight where the market is expecting for it to grow 0.3% m/m during September 2023. In Europe, tracking the sell-off in UST, Bund and Gilt markets also weakened. Although, there was mixed tone among policy-setters in the region, Spain’s central bank governor Pablo Hernandez de Cos said that the surge in bond yields means that the ECB probably had done enough to tame inflation while BoE Chief Economist Huw Pill warned that more work is needed to bring inflation down to 2.0%.

MYR Government Bonds: Malaysia’s bond market’s immediate reaction to Friday’s Budget announcement was lukewarm as many of the measures were within expectations. Very little action was seen as the flows remained tepid. MGS curve moved slightly higher on Monday. The RM85.4 billion fiscal deficit target for 2024 and maturity of RM93.0 billion, should see MGS+GII issuance in the range of RM170 – RM180 billion (2023 E: RM186 billion). The range considers maturing SPK bonds of RM5.5 billion.

MYR Corporate Bonds: The volume traded in the PDS market improved and was decent at RM616 million. Among notable trades were MYR140 million on GG-rated 11/25 Danainfra Nasional done at 3.66%, MYR100 million on 10/36 Danainfra Nasional done at 4.32%, and MYR40 million on 04/28 Southern Power Generation (AA- rated) done at 4.35%.

Forex

US: A retreat in USD was seen overnight with the DXY down 0.4% to 106.24. There was hint of ease in geopolitical tension which sent USD lower amid talk of diplomatic efforts to contain the war, including anticipated Biden visit to the middle east. Data only slightly supported the USD, including the October Empire manufacturing survey down to -6.5 from -4.6 but which was a smaller decline vs expectation. Monday's rally in US equities may also have pared liquidity demand for the USD.

Europe: EUR gained 0.5% overnight, snapping a two-day losing streak, while GBP posted a 0.6% gain. ECB policymaker Nagel said that inflation remains high, and that monetary policy would remain restrictive for the foreseeable future. ECB President Lagarde said the labor market is real signs of weakening. However, another ECB official, de Cos, said high market rates now may mean ECB has done enough to counter inflation. Meanwhile, BoE Chief Economist Pill said that there are more policy actions to be conducted by the central bank to direct inflation back to its target.

Asia-Pacific: CNY weakened slightly as the PBoC added a net CNY289 billion liquidity into the financial system through its 1-year policy mechanism on Monday. This was the largest injection since December 2020. Markets await China's release of 3Q2023 GDP tomorrow where consensus expectation is for a smaller growth of 4.5% y/y against 6.3% prior, as well as industrial production data for September with consensus expectation for a 4.4% y/y growth vs 4.5% prior. Meanwhile, USD/JPY stayed steady near 149.50. Chief Japan currency official Masato Kanda remarked that rate hikes and intervention are options to respond to excessive moves in the currency.

MYR: MYR closed lower amid the ongoing risk aversion due to the middle east turmoil. International Trade and Industry Minister Zafrul Aziz told Bloomberg that impact on Malaysia's trade from the middle east factor remains small, but authorities will monitor if there is escalation to other countries.

Other Markets

Gold: Gold fell 0.7% on Monday as global bond yields continued to rise amid the outlook for higher interest rates.

Crude Oil: Crude oil fell with Brent down 1.4% and WTI down 1.2%

FBM KLCI: KLCI fell 0.4% to close at 1,439 yesterday, amid the risk aversion in the region. The MSCI Asia Pac index fell 0.9% but the MSCI World index rose 0.8%. In Malaysia, foreign investors were net sellers of MYR208.7 million shares yesterday.

US Equities: US stocks posted gains overnight amid diplomatic talks to prevent the war from expanding into other countries in the middle east. The S&P 500 gained a firm 1.1% which comes ahead of several corporate earnings report this week. The Dow posted a 0.9% gain.

Source: AmInvest Research - 17 Oct 2023