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| – 28 February 2010 |
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Lingering doubts on the strength of economic recovery combined with jitters on sovereign debt problems in Greece and other European countries (particularly Portugal, Ireland, Italy and Spain) caused the local bourse to drop 43 points in the earlier part of February. This was reversed as hopes rose on Greece being bailed out by Germany and the EU. Subsequently, as local investors returned from the long Chinese New Year break, the local market continued to edge up, taking the cue from gains on Wall Street and brushing aside China’s decision to raise bank reserve requirements for the second time this year. However, regional markets turned weaker briefly after the US Federal Reserve unexpectedly raised the discount rate for the first time since the financial crisis, sparking fears of further monetary tightening by the US. Despite this, the local bourse remained relatively resilient as results were generally robust in the current reporting season. Global markets steadied themselves after Fed Chairman Bernanke reaffirmed his commitment to keep interest rates low for an extended period to sustain the still-fragile US recovery. On Bursa Malaysia, the FBM KLCI ended the month with a slim gain of about 1% while performances around the region were quite mixed: Tokyo (-1%). Hong Kong (+2%), Korea and Singapore largely unchanged, Taiwan (-3%), Thailand (+4%), Philippine (+3%), Jakarta (-2%), Shanghai (+2%) and Shenzhen (+5%). In the US, the DJIA was up 3%. |
Malaysia’s economic data showed some improvements in February. The country’s exports bounced back strongly to increase by 18.7% year-on-year in December 2009, from -3.3% in November, attributable partly to a recovery in global demand. Similarly, after a contraction of 0.8% in November, industrial production bounced back to increase by 8.9% year-on-year in December. Malaysia’s real GDP turned around to record a growth of 4.5% year-on-year in the fourth quarter of 2009, from -1.2% in the third quarter, and after three consecutive quarters of contraction. The fourth quarter GDP was above market consensus of 2.7% and brought full year GDP decline to 1.7%, the first decline in 11 years. Separately, on a downbeat note, Malaysia was reportedly lagging behind its regional peers in wooing foreign direct investments. Manufacturing investment approvals were down sharply 48% year-on-year to RM32.6 billion in 2009, although fourth quarter approvals registered a commendable rebound of 18.9% year-on-year to RM12.7 billion in the fourth quarter of 2009. |
Across most of Asia, central banks are under increasing pressure to start reversing their extremely loose monetary policies to pre-empt any rising inflationary pressures or asset bubbles and to give themselves maximum policy flexibility going forward. For Malaysia, as expected, CPI increased for the second time in a row in January and is expected to continue trending up, reflecting the combined impact of a low base effect and the recovery of domestic demand. An early rise in the target rate in Malaysia is not totally unexpected as the central bank had acknowledged that there was a need for Malaysia to normalise its interest rates from the current unprecedented low levels, on economic strength. |
Until such time that there is greater clarity on the timing and aggression of stimulus withdrawal and better visibility on future growth, markets are expected to continue being volatile on the back of fragile sentiment and potentially mixed newsflow. However, the local bourse may find some catalyst from the forthcoming Invest Malaysia annual investor conference in which typically some capital market friendly measures may be announced. At that time, the New Economic Model is to be revealed. |
| Fixed Income |
Prices of US Treasuries fell during the first trading week after January’s ISM manufacturing index expanded at the fastest pace in more than five years. Fourth quarter GDP expanded rapidly by 5.70% annual pace, more than 2.20% previously. |
A brief rally was seen across the board as the sovereign crises in Portugal, Greece and Spain spurred investors to seek comfort in low risk US government debt. Yields on 30-year Treasuries fell as much as 12 basis points, the most since October 2008 to 4.52% on risk aversion flows. |
Hawkish readings of January’s FOMC minutes set a negative tone to the bond market as members were divided on the quantitative easing programme. A large portion of the discussion was centred on normalisation of discount window rates and selling of Fed assets. Two-year Treasury yields surged by 0.10 percentage points to 0.950%, in response to the 25 basis points increase in Federal Reserve’s discount rate to 75 basis points effective 19 February. The Fed’s move initially fuelled selling in short-dated Treasuries, whose yields are the most sensitive to changes in rate outlook. |
Towards month end, soft economic data provided support for Treasuries, with longer term securities leading the advance. 10-year yields fell back close to their levels at the start of February. Reassurance from the Federal Reserve Chairman Ben Bernanke to hold interest rate at record lows and sovereign risk concerns of the Greek government fuelled demand at Treasury auctions during the month. |
Into February, the MGS yield curve flattened, led by increasing short-end yields as investors priced in a rising interest rate scenario sooner than expected following Bank Negara’s hawkish statement at the previous Monetary Policy Committee (MPC) meeting. Government bonds traded lower in lacklustre trade following renewed optimism on economic outlook. Exports and industrial production returned to growth in December, increasing by 18.70% and 8.90% on year respectively due to improvements of the overall global trade activities. |
Towards mid-February, the sovereign debt market traded range bound as investors prepare for the Lunar New Year holiday. Activities were concentrated on the 5-year benchmark as the new 5.5 year security was the only government debt auction during the month. The auction garnered decent demand with bid-to-cover ratio at 1.995x and average yield of 3.835%. |
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