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| – 31 July 2010 |
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| The local bourse, which saw buying interest return in July, brushed aside a 25 basis points hike in the overnight policy rate on 8 July and followed US and regional markets higher. Investors’ sentiment was lifted after the International Monetary Fund raised its 2010 global growth forecast coupled with a successful start to the US earnings season. News that beleaguered Greece had a successful debt auction also added to the positive tone. However, some caution set in when US Federal Reserve members cut their growth forecast for US and investors’ concerns heightened after Federal Reserve Chairman Bernanke said the economic outlook remained “unusually uncertain” without offering additional measures to stimulate growth in the US. Separately, investors heaved a sigh of relief on news most European banks seemed to have passed their stress test. Chinese markets were firmer on speculation that Beijing would roll back policy tightening later this year to support growth, shrugging off concern over slowing US economic growth. On the local bourse, expectations of some sizeable privatisation exercises helped perk up the market. The FBM KLCI was up by 4%, lagging some of the other markets: US (+7%), Japan (+2%), Hong Kong (+4%), Singapore (+5%), Taiwan (+6%), Thailand (+7%), Philippines (+2%), Jakarta (+5%), Shanghai (+10%) and Shenzhen (+14%). |
| Consistent with emerging soft patches in the global economy, Malaysia’s economic data released in July were generally signaling a moderating trend. Exports weakened for the second consecutive month to 21.9% year-on-year in May from 26.6% in April; Malaysia’s leading index’s six-month smoothed growth rate slowed down for the second consecutive month to 3.1% in May from a recent high of 11.2% in March. However, industrial production was rather resilient, rebounding to increase by 12.5% year-on-year in May after slowing down to 10.7% in April. Separately, it was reported that inflow of foreign direct investment into Malaysia fell for the second consecutive year by 81.1% to US$1.4 billion in 2009, compared with -14.3% or US$7.3 billion in 2008. |
| A step in the country’s subsidy rationalisation programme was made when the government announced cuts in subsidies for petrol, diesel, liquefied petroleum gas and sugar in July. Malaysia’s headline inflation grew at a faster pace of 1.7% year-on-year in June versus 1.6% in May and will likely accelerate following the removal of these subsidies. |
| In the US, as consumer spending decelerated, GDP growth slowed to 2.4% in the second quarter, less than forecast, after a 3.7% upwardly revised gain in the first quarter. Over in Europe, confidence in the economic outlook in the 16-euro nations rose to the highest since March 2008, while German unemployment declined for the 13 th month as exports sustained a recovery in the region. In China, manufacturing grew at the slowest pace in 17 months in July as the government clamped down on property speculation and investments in energy-intensive and polluting factories. |
| For now, markets appear to be adapting relatively well to the slower growth view. The recent upswing had taken several major markets to hit their resistance levels; a consolidation of these gains into the usual lull summer months in the Northern hemisphere looks likely. |
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| Fixed Income |
| The US bond market had a weak start with prices drifting lower on profit taking and unwinding of flattening trades. Easing concerns over the Eurozone debt problems and optimism on corporate earnings reduced demand for safe assets. The benchmark 10-year yield rose above 3% after the significant rally last month. Supply pressure also mounted on the bond market when the Treasury Department announced $69 billion in sales. |
| Towards mid June, prices found support when FOMC minutes came in with downward revisions and dovish interpretations. Long-term forecasts for growth and core inflation were adjusted lower while unemployment rate was projected higher. The Federal Reserve Chairman’s reference of an “unusually uncertain” economy during his testimony to the Senate Banking Committee provided further support to Treasuries, causing the 10-year yields to dip below 3% again. US Treasuries were mostly bullish for the rest of the month as economic data points to a slowing recovery, with the second quarter GDP moderating to 2.60% from a revised 3.70% in the first quarter. Accompanying the slower growth were weak housing data and falling consumer confidence. |
| Local bonds traded steadily in range bound patterns ahead of Bank Negara Malaysia’s monetary policy meeting. On 8 July, the central bank raised overnight policy rate by 25 basis points for the third consecutive time to 2.75% and signaled a pause in monetary normalisation. MGS curve bullish flattened led by declining long-end yields given muted interest rate risk over the short-term and benign inflationary trend. June’s inflation data were within expectations, increasing a tad higher at 1.70% from 1.60% previously. During the month, the government announced cuts in subsidies for fuel and sugar as a first step to the rationalisation programme. The bond market was stable and did not warrant a sell-off as price increases are expected to be marginal. |
| Government auctions during the month were met with strong demand, registering a bid to cover ratio of 3.08x for the 5-year GII and 2.42x for the 7-year MGS. |
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