A Brief on Global & Local Markets, Investment Strategy.
Week in Review | 8 – 12 July 2019
Dovish remarks by Fed chief reignites sentiment
Despite getting off on the wrong foot, global equity gauges quickly shook off the wobbly start to stage a strong midweek recovery behind dovish remarks from Fed Chair Jerome Powell, which renewed expectations for Fed rate cuts. The S&P500 in particular closed the session up 0.8%.
Following the upbeat US labour report from the prior week, markets appeared to be set for a softer showing as investors reacted to diminished prospects for near-term Fed rate cuts. However, Powell’s testimony to the US congress on central bank policy direction quickly quell looming jitters; as he suggested that a rate reduction is appropriate at this point to combat: (i) persistently low inflation and (ii) downside risks in manufacturing and business slowdown.
Several other FOMC members also shared Powell’s sentiment for more accommodative monetary policy in separate statements. The 10-year Treasury benchmark yield surged sharply over the week; briefly touching a high of 2.15% before easing back down to 2.10% as of end-Friday.
In any case, an interest rate cut appears to set in stone for the upcoming FOMC meeting slated end-July. While a portion of the market have priced in the possibility of a 50bps rate cut this month, we think that a 25bps insurance cut is a more plausible outcome at this juncture. Should economic data points continue to deteriorate in the coming months, then markets could witness another 25bps cut before the end of the year.
US inflation data was also in focus last week, as readings for the core Consumer Price Index (“CPI”) saw a 0.30% m-o-m gain. Though delving deeper into the report, the gain is largely bolstered by the surge in apparel prices (+1.10%) and is widely perceived to be more of seasonal effect as opposed to a sustainable driver for inflation moving forward. Having said that, we expect inflation to remain benign for the near to medium-term. Current core Personal Consumption Expenditures (“PCE”) reading – which is the Fed’s preferred measure for inflation – still sits around the 1.60% level; markedly short of the central bank’s 2.00% target.
Asian markets pare losses on Fed rate cut optimism
The US market continued its ascent on expectations of a rate cut by the US Federal Reserve that pushed the S&P500 higher to close above the 3000 level for the first time. Asian markets however did not mirror gains in Wall Street closing the week in the red with the MSCI Asia ex-Japan index down 1.2%.
The broader Asian benchmark gauge managed to recoup some losses later in the week following Chairman Jerome Powell dovish testimony at Congress and better than expected credit data from China. China’s outstanding total social financing (“TSF”) rose to 2.26 trillion yuan from 1.4 trillion yuan in May, which also topped market consensus expectations of 1.95 trillion yuan.
Both US and China also restarted trade negotiations last week after US President Donald Trump and China President Xi Jinping met at the G20 summit in Japan last month, where both countries agreed to move forward with talks and hold off on imposing new tariffs.
However, discussions failed to yield any tangible agreement or a timeline for future talks. China also refrained from purchasing more agricultural imports from the US which added fuel to tensions. US-China bilateral ties were further tested after the US State Department approved a US$2.2 billion arms sale to Taiwan, despite Chinese criticism of the deal.
Singapore also released its GDP print last week which fell below expectations, posting growth of just 0.1% y-o-y in 2Q’19. Singapore’s heavy reliance on trade makes it vulnerable to a slowdown in world growth and tariff wars. Exports have already taken a big hit over the past few months, with shipments plunging in May by the most since early 2013.
In a recent interview, Indonesian President Joko Widodo also announced proposed tax breaks for corporates and individuals in a bid to shore up growth in its economy. The earliest indication of when the tax break would take effect would be sometime in August’19, when Indonesia tables its budget for next year and if tax estimations are revised. Jokowi also proposed reforms in its strict labour laws to spur investment in the country. However, an overhaul of its labour laws may be more politically difficult to manoeuvre with strong lobby groups.
On the economic docket this week, China is slated to report its 2Q’19 GDP numbers followed by its industrial production data. It is also earnings season with big banks JP Morgan, Goldman Sachs, and Wells Fargo kicking off results this week that would provide cues on market direction.
On portfolio positioning, we continue to remain invested with the view that there will be more room for markets to run, as global investors pin their hopes on a Fed rate cut. Though, weaker economic data and poor earnings may put a dampener on the rally.
Updates on Malaysia
On the domestic front, the local market took cues from regional markets with the benchmark KLCI closing 0.8% lower. The local market remains caught between a tug of war between the broader macro environment (i.e. trade tensions) and micro picture (i.e. government policies and domestic growth). Though, with a stronger financial standing there is more fiscal room for the government to manoeuvre and prop-up growth in the 2H’19.
Recent data also shows that approved foreign direct investment into the manufacturing industry surged 127.0% in the 1Q’19 y-o-y according to The Edge. Malaysia is emerging as one of the key beneficiaries of trade diversion flows with the US and China still locked in a protracted trade war.
Fixed income updates & positioning
The correction in US Treasury yields translated to a rather mixed week for regional bonds; where demand for the longer-end segment finally eased after an impressive stretch of performance in the several weeks before.
Though having said that, we think that the short-term pullback presents the opportunity to add on positions, and our long-duration bias remains given the following points of consideration: (i) US Fed’s recent dovish tilt, (ii) ongoing trade concerns, and the (iii) broad weakness in manufacturing PMI and earnings; all of which are supportive for Treasuries, and subsequently, other government bonds for near- to medium-term.
Similarly, we are taking on a rather optimistic view for the Asian credit segment as well – as the current low yield environment continues to bring forth strong flows into the region in search for higher yielders. Markets have also witnessed several launches of fixed maturity bond funds in the region (including Singapore) in recent weeks. This should provide further support for regional issuances, especially those that are of 3-4 years in tenure.
In terms of portfolio positioning, we have taken the opportunity to redeploy monies (from recent maturities) into new issuances for some of our Asian mandates; particularly Chinese property names for added yield carry. Furthermore, we have also added exposure into 30-year Treasury notes following the correction last week. As for our currency exposure, we have reduced the bulk of our open position in USD, with other currencies also largely hedged back to MYR.
On domestic news flow, BNM kept the overnight policy rate (“OPR”) unchanged in its MPC meeting last week. The central bank adopted a rather neutral tone overall, but also acknowledged the downside risks arising from ongoing trade uncertainties as well as the broad global economic slowdown in its meeting minutes. BNM also maintained its GDP growth forecast for the year at the 4.30% to 4.80% range.
In our view, any near-term OPR cut by BNM is unlikely given its recent wait-and-see bias. Though, depending on the magnitude of monetary policy easing in the US as well as the Malaysian’s government direction on stimulus and spending for 2H2019, a rate cut could be warranted in the next 6 to 12 months.
Local bonds continued to enjoy healthy traction over the week. Following the MPC meeting, the 10-year MGS rallied strongly to 3.61%. New issuances that rolled-out into the market last week – including a 7-year government tender as well as names from the corporate segment – were well-subscribed with bid-to-cover ratios of 3 to 4 times.
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