Snapshot Summary…

Global Rates: Global bond volatility eased after traders priced out hard- landing prospects

MYR Bonds: We see risk of profit-taking in MGS alongside GDP release while there’s opportunity in AAA Pengurusan Air SPV in our view

Global FX: The dollar index showed volatility last week but cautious ahead of key US data this week

USD/MYR: Ringgit strengthens driven by suspected foreign flow and stronger than expected Malaysia’s industrial production data

Fixed Income

Global Bonds: Global markets underwent heavy volatility in the past week after the weak July NFP release. Yields tumbled on shorter to medium- maturity papers (the 2Y UST by up to 30 bps w/w) before partly reversing late in the week. The weak NFP rekindled fears of a US hard landing and raised the possibility the Fed was behind the curve in cutting interest rates. Adding to the safe-haven bond attraction was weakness in the equities markets, especially in tech stocks, amid the fears of fresh US growth. Markets stabilised by the end of the week as expectations of large rate cuts subsided. The release of lower weekly jobless claims, as did Fed officials’ comments, aided the reversal. Kansas Fed President Jeffrey Schmid signalled that he was not ready to support rate cuts. At the same time, Governor Michelle Bowman said inflation was "uncomfortably above" the 2% Fed target and was subject to upside risks. We await the US CPI and PPI this week. The expectation for the July CPI is +3.0% y/y, i.e., the same level as in June.

Malaysia Government Bonds: Mirroring the global markets, Malaysian government bonds pared down gains to close mixed. Shorter maturity bond strength was partly on the back of the strong MYR as speculation of a firmer currency brought flows into the front of the curve. IRS levels also fell, guided by pricing in of developed markets’ rate cuts, and less so on a potential BNM rate cut, which we think is not on the table on inflationary pressures reappearing amid risks of subsidy rationalisation plans.

Malaysia Government Bonds View: We express more profit-taking risks this week, with data out being the 2Q2024 GDP, where consensus is a firm +5.8% y/y vs +4.2% in 1Q2024. We also have MYR3.0 billion reopening of MGS 03/53 with MYR2.0 billion PP, but we expect firm demand and see higher yields after hitting lows last week.

Malaysia Corporate Bonds: There was a mixed showing in the PDS space last week, affected by MGS paring gains. Concurrently, heavy flows amid net buying interest fell as the market stabilised at the end of the week. Theaverage volume was MYR857 million per day vs MYR718 million the week prior.

Malaysia Corporate Bonds View: Picking select AAA water services papers still offers some, especially Pengurusan Air SPV on front of the curve (Exhibits 3-4).

Forex

DXY Index: The dollar index (DXY) was volatile over the week. Notably, the index fell below 103, marking the lowest price level of the week due to weaker performance and dovish comments from Fed officials, particularly regarding concerns about the job market's softness. It faced further pressure from safe-haven currencies like the yen and Swiss franc. Still, it recovered to above 102.5 as market expectations for a substantial Fed rate cut diminished, with reduced anticipation for a 50 bps cut in September. It continued the uptrend to the week's highest point, around 103.5-level following better-than-expected jobless claims. This rebound was also partly supported by hawkish remarks from Kansas Fed President Jeffrey Schmid. This week, market participants should remain vigilant ahead of key US data such as the US CPI (a slight rebound m/m is expected after a decline in the prior month’s reading) and retail sales.

Europe: Fears that the US could dive into a recessionary environment and the Fed could take deep rate cuts during the upcoming meetings this year drove most of the FX sentiment and flared up the volatilities. The euro managed to hold its ground and posted 0.1% gains over the USD w/w, but the British pound fell by 0.3% at the same time. Data-wise, the July Composite PMI for the Eurozone suggests that economic activity was barely growing during the month, while the Composite PMI for the UK underpins healthier and growing activities among manufacturers and service providers during the same month. This week, the UK will take centre stage, with four days of data releases that may influence the BoE on how it will act further after it undertook the first rate cut in a while.

Asia: The headline in this region last week was the unprecedented unwinding of carry trades among investors, which heavily benefitted the Japanese yen. While weekly movement showed the Japanese yen eked out depreciation of 0.1%, mid-week, it briefly touched its strongest level since January this year of around 144-level before erasing some of those gains as the fears in the market subsided. Still, the current circa 147 per dollar level is 9.7% stronger than the multi-decade low it reached in early July. Data from the CFTC showed that the short yen positions by speculators have dwindled further, supporting the case for a stable yen moving forward. After the dramatic fall on the USD/JPY pair early last week, we saw some rebound and eventually traded sideways as market players pared expectations that the BoJ would raise its interest rates again in the 20th September meeting after it did so recently, following BoJ Deputy Governor Shinichi Uchida's statement that the central bank will not tighten its policy if financial markets are unstable. In China, the yuan followed the yen’s trend, firming up the 7.14 level before returning to 7.16 per dollar by the end of the week. On the data front, weaker-than-expected China’s exports suggest global trade recovery remains challenging. In the meantime, Australia’s central bank kept its cash rate unchanged at 4.35%. It reiterated the need to keep the restrictive policy as the inflation in Australia remains hot, which is a hawkish tilt tone in our view. This may provide a cushion for the AUD and keep it above the 0.65 level.

Malaysia: Ringgit saw as much as 1.6% w/w gains, benefitting from suspected foreign flow as the US Fed is expected to undertake its first rate cut after holding it at a decade-high. Data released on the domestic front also weighed the sentiments favourable for the ringgit as the industrial production for June grew 5.0% y/y after May’s figure of 2.4% y/y, beating market expectations of 4.2%. However, we express some cautious mode ahead of US inflation and retail sales data alongside the ongoing geopolitical tension in the Middle East.

Source: AmInvest Research - 13 Aug 2024