A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 7 January 2019 – 11 January 2019



US Shutdown Impasse and Dovish Fed Drags Down Dollar

It was another positive week for risk assets as soothing comments from the US Federal Reserve lent a reprieve to markets. This was affirmed by minutes released last week by the FOMC of its meeting in December’18 which showed consensus among officials that the Fed could be more patient in its rate-hike cycle and balance sheet normalisation.

The minutes echoed remarks of Fed Chair Jerome Powell early this month that the Fed would be flexible in its policy approach and that the central bank was attuned to possible downside risks including slower economic growth and escalation in trade tensions.

Currently, Fed funds futures are pricing-in for a pause in interest rates in 2019 with a 45% chance of a rate cut in 2020. With a more dovish Fed, risk assets managed to climb higher though it surrendered back most of its gains at the end of the week amidst a prolonged partial government shutdown in the US that became the longest closure in history at 22 days.

The deadlock has paralysed Washington as US President Donald Trump remained steadfast in his demand to secure funding to build a Mexico border wall, resulting in a string of temporary closures of governments department and federal employees having to work without pay.

Among those departments affected include the US Department of Commerce which would not be publishing its regular economic statistics during the shutdown period that could cast some uncertainty surrounding the monetary policy outlook especially with a Fed that is on a ‘wait-and-see’ stance. We see impact of the shutdown being constrained economically, though consumer sentiment could take a hit as seen similarly in 2013 under President Barack Obama.

Against such government shutdown concerns and a more dovish Fed, the US dollar lost 0.6% YTD last week. Best performers were led by commodity-linked currencies including the Indonesia rupiah which rallied 2.4% followed by the Thai Baht. The Chinese yuan and Ringgit similar had a better showing edging 1% higher.

Brexit Vote Looms, but Defeat Certain for May

British lawmakers are set to vote on UK Prime Minister Theresa May’s much disparaged Brexit deal on Tuesday, though it faces almost certain defeat with daunting opposition. This puts the entire deal back in limbo with PM Theresa May having to go back to the drawing board again where she could also face a no-confidence vote. The UK is set to leave the EU-bloc by the end of March 2019 without a deal yet in sight.

Asian Equities Gains on Trade Optimism and Waning USD

With the shift in tone by the US Federal Reserve, Asian equities performed better amidst signs of US dollar strength starting to weaken with the Asian dollar index having appreciated 3% since its lows in October. Consequently, fund flows are also starting to return back to EMs especially within the passive space.

The Hong Kong Hang Seng Index and the broader MSCI Asia ex-Japan index closed 4.1% higher. Easing measures announced by China has also propped up the market, though close monitoring would be needed to see if such stimulus has started to trickle-down to growth and GDP possibly sometime into the 2Q’19 due to lag effects.

Market sentiment was also buoyed by trade optimism surrounding ongoing US-China negotiations which took place last week. Negotiations between the two world’s largest economies was extended into an unscheduled third day as the two global powerhouses attempt to broker a deal before the 90-day truce period which ends on 1 March 2019. Failure which, we could see a resumption of trade tariffs with over US$200 billion of Chinese goods levied at 25%.

Playing against this backdrop is news of Huawei having fired a sales director who was arrested in Poland on charges of conducting espionage on behalf of China. However, the telecoms giant was quick to distance itself from the case adding that the employee’s actions ‘had no relation to the company’.

The case has compounded fears of alleged spying activities by Beijing and ignited concerns of national security. Recall in December, that the company’s CFO Meng Wanzhou, was arrested in Canada on the request of the US government, amidst suspicions that she had circumvented sanctions against Iran. Developments surrounding Huawei is unlikely to throw a spanner in the works and thwart ongoing negotiations with both the US and China isolating both the arrest and trade as separate issues.

On portfolio positioning, we have been deploying back into the market with current invested-levels of our Asian portfolios ranging between 80% – 90%. We have been adding back weights into AIA, Tencent and PingAn as valuations have turned more attractive. We are also allocating towards Thailand and Indonesia which stand to be beneficiaries of inflows including IDX-listed heavy equipment manufacturer United Tractors and Thai convenience store operator CP All Plc (CPALL).

Updates on Malaysia

On the domestic-front, the local market took cues from regional gains with the benchmark KLCI inching 0.8% higher, but was weighed down by declines by rubber glove component stocks of the index.

Last, week, rubber glove makers led declines in the local burse with shares of Hartalega, Top Glove and Kossan plunging amidst concerns of a stronger Ringgit that would be negative for exporters. The Ringgit stayed in the middle of the pack among Asian currency gainers last week, though upside could be capped if momentum falters and if the Ringgit can break past the 4.09 resistance level.

Finance Minister YB Lim Guan Eng got into an open tiff with Japanese research house Nomura over concerns of fiscal slippage against a slower growth environment and lower oil prices. In a sharp rebuke, the Finance Minister clarified that sales and service tax (SST) collections exceeded the ministry’s initial projection by 34% at RM5.4 billion, compared to the projected figure of RM4 billion. This brings the figure to more than RM60 billion if annualised which is higher than the Budget 2019 estimate.

Any shortfall could be plugged by collections from the Inland Revenue Board of Malaysia (IRB) which aims to accumulate over RM10 billion in tax collection via the Special Voluntary Disclosure Programme (SVDP).

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