Outflows of bond squeezed Ringgit - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

IT was another week to forget for the local stock market. The overall equities market continues to remain on its back foot as investors continued to take money off the table ahead of the US Federal Reserve’s Federal Open Market Committee (FOMC) on 20-21 September 2022.

The benchmark KLCI Index ended the holiday shortened week at 1,467.31 points (-29.22 points or -1.9%) on the back of continued lackluster trading volume and value.

My view on the Malaysian equities market remains unchanged and it is likely to continue hovering around the 1,500 points level with a +/- 50 points variation in the next few weeks given the lack of market moving catalysts to spur increased trading among investors and traders. The nearest potential catalyst for the market is the Budget 2023 which has been brought forward to 7 October 2022 from 28 October 2022.    

The bond yields for US Treasuries (UST) went ballistic across the board following the latest US inflation report which indicated inflationary pressures were much stronger than expected. US CPI rose 8.3% year-on-year and 0.2% on a month-on-month basis. This prompted the market to adjust their portfolios in anticipation that the US Federal Reserve will increase rate at faster pace and hold them at a neutral level for a longer than expected period.

Bond yields rose for a fourth consecutive week as the fixed income market prepares for a 75 basis points hike by the FOMC with some economists even boldly predicting the likelihood of a 100 basis points, which will be the highest in 40 years. As a result, bond yields for the 10-year UST jumped by another further 12 basis points on top of last week’s massive 16 basis points to 3.45% from 3.31% last week. This bring the total yield gains for the last three weeks to 42 basis points.   

The UST 2-year yields also surged to its highest level since November 2007 when it briefly touched 3.90% before settling down to end the week at 3.87%, which translates to a massive 31 basis points gain from last Friday’s close of 3.56%. The jump in the UST 2-year yields meant that the yield curve inversion between the UST 2-year and 10-year notes continues into its 10th consecutive week and widens further to -42 basis points from -25 basis points in the week before. The long-term average of the yield spread for both UST is +0.92% or +92 basis points.   

Given the sky rocketing yields in the UST market, the 10-year MGS bonds finally succumbed to profit taking after holding steady last week. The 10-year MGS yields ended the week 10 basis points higher at 4.13% from 4.03% last Friday. The jump in both the UST and MGS yields brings the yield spreads between both countries’ 10-year bonds to narrow slightly by 4 basis points to just 68 basis points. This means that the yield spread has closed by 25 basis points over the past three weeks and is likely to continue to exert selling pressure on the MGS in the near term.  

ECONOMY

Petroliam Nasional Bhd (through its wholly owned subsidiary Gentari Sdn Bhd) has signed 12 memorandums of understandings with international hydrogen players. Gentari Chairman Datuk Tengku Muhammad Taufik Tengku Aziz said Gentari will offer green mobility solutions to the Asia Pacific region, which would benefit both drivers and other road users.

Malaysia External Trade Development Corporation disclosed that Malaysia’s machinery and equipment (M&E) exports reached RM34.3 billion for the first seven months of 2002.  It added that the M&E industry is the seventh largest export sector for our country which is valued at RM49.9 billion and constituted 4% of Malaysia’s total exports in 2021. The key export markets are Singapore, United States of America, China, Indonesia and Thailand.

CURRENCY

The magnitude of the drop in Ringgit against the US Dollar took many by surprise. Preliminary indications are that the bulk of the outflows came from the bond market where the sell off was much larger than the equity market. The performance for the Ringgit was mixed against other major currencies.

Once again, the strength in the US Dollar continues to be primarily driven by expectations among market participants that the US Federal Reserve will hike the Federal Funds Rate by at least 75 basis points at the upcoming FOMC meeting. The local currency ended the week at RM4.5330 / USD1.00 (-3.7sen) which is also a 24-year low against the greenback.

The Ringgit also ended the week lower against the Euro at RM4.5369 / EUR1.00 (-2.1sen), the Japanese Yen at RM3.1680 / JPY100 (-1.8sen) and the Singapore Dollar at RM3.2241 / SGD1.00 (-1.0sen). However, the local currency gained against the British Pound at RM5.1740 / GBP1.00 (-3.8sen).

For the week ahead, I am adjusting my forecast on the Ringgit / USD trading band to between RM4.50 to RM4.55. For the other major currencies, I am maintaining my view that they will continue consolidating for the next few weeks.       

POLITICS

Gerakan Tanah Air (GTA) Sponsor Chairman Tun Dr Mahathir Mohamed disclosed that GTA will not cooperate any party that is involved in either corruption or in establishing a government through the back door. GTA currently has four (4) parties in the coalition – Parti Pejuang Tanah Air, Parti Bumiputera Perkasa Malaysia, Barisan Jemaah Islamiah Se-Malaysia and Parti Perikatan India Muslim Nasional. He added that GTA is awaiting for a decision from the Registrar of Societies on its application to be registered.   – DagangNews.com    

  Manokaran Mottain has been an economist with a number of financial institutions is now managing his own firm, Rising Success Consultancy Sdn Bhd