Tuesday, May 31, 2016

Cautious Eye on the Fed and UK Referendum

2016, Issue V:  Cautious Eye on the Fed and UK Referendum     

Key themes[1]

§  First, US Fed timeline for eventual future rate hike remains data dependent. US growth recovery remains on track but recent global developments out of China and volatile market activity may potentially affect the number of hikes in 2016. Fed officials including Yellen  are more hawkish recently. Markets are now expecting 1 Fed hike in 2016; we are expecting 1-2 rate hikes by end 2016. Key US events: ISM Manufacturing Mar (1 Jun) (expected: 50.4); US May NFP (3 Jun) (expected: 160k); Fed Chair Yellen to speak in Philadelphia (7 Jun); US-China Strategic Dialogue (6-7 Jun in Beijing); FOMC meeting, May CPI (16 Jun); May durable goods (24 Jun); 1Q GDP third print (28 Jun).
§  Second, Japan’s 2% inflation target has been pushed back to 2H FY 2017 (by Mar 2018) due to oil softness and slow traction in wage increases. The credibility of Abenomics has waned somewhat in 2016 even though the easing bias is still clear.  We do not expect any further moves by the BOJ until Jul meeting at the earliest  and further jawboning is likely until then. Postponement of the consumption sales tax hike to Oct 2019 is now very likely, removing a likely drag on the economy.  PM Abe will hold a press conference on 1 Jun to announce his decision on holding simultaneous elections for both houses of parliament and on the sales tax hike in Apr 2017. BOJ policy board member Sato speaks in Kushiro on 2 Jun and BOJ deputy governor Nakaso speaks in Akita on 9 Jun and then again to the National Credit Union Association on 24 Jun. BOJ meets on 16 Jun to decide on policy. There is also the final print of 1Q 2016 GDP due on 8 Jun. JGB auctions in Jun: 10-year (2 Jun), 30-year (7 Jun), 5-year (9 Jun), 1-year (14 Jun) and 20-year (23 Jun).
§  Third, we expect ECB to keep monetary policy stance status quo at the upcoming meeting (2 Jun) as ECB is determined to ease financing conditions, stimulate new credit provision in an attempt to reinforce growth momentum and return inflation to medium term objective of 2%.  Front-end yield differentials between 2Y Euro and UST bonds widened and may weigh on Euro with some limits. Downside likely to be limited around 1.08 - 1.09 levels.   ECB meeting, Apr PPI (2 Jun); 1Q GDP final (7 Jun); May CPI (16 Jun); Jun ZEW survey expectations (21 Jun); Jun confidence indicators (29 Jun).
§  Fourth, China still has excess capacity, heavily indebted corporations and huge liquidity injections continue to add immense pressure on the economy and the yuan medium term. PBOC continues to rely on SLF, MLF and PSL  as liquidity tools, we do not rule out interest rate cut of 25bps and RRR to be cut in intervals by another 100bps within the year.  Activity indicators (i.e. urban investments, industrial production and retail sales) will continued to be eyed.  May PMI-mfg is due on 1 Jun along with Caixin version. The China-US Economic and Strategic dialogue is scheduled on 6-7th. Foreign reserves and trade data are curiously scheduled for release on 7th and 8th respectively. CPI and PPI on the 9th. Activity data will be released on the 12th.  Liquidity numbers are due from 10th-15th. We also like to watch Apr industrial profits due on the 27th. We also eye potential inclusion into MSCI and JPM bond indexes.
§  We believe AXJs could see some weakness in 1H of Jun in the run up to the June FOMC. We could see initial broad USD strength in the lead-up to Jun FOMC and potential sell-off thereafter.  

[1] Underlined words represent new developments in the FX themes.

[1] Italicised and underlined words represent new developments in the FX themes.

Morning News - 31 May 2016 - MCIL / EVSD / JAKS

Today’s Highlights
    Results Note – MCIL (SELL, maintain) - Disappointing set of results
    Results Note – Eversendai (BUY, maintain) - Fair value loss
    Results Note  – JAKS Resources (BUY, maintain) - Maiden contributions from Vietnam

Quick Bites
    AirAsia: US$1bn offer for leasing company

Outside Malaysia            
    Euro area economic confidence rises as ECB stimulus kicks in
    German consumer prices unexpectedly halt slide before ECB meets
    French economy grows faster than estimated as investment jumps
    Japan’s retail sales stall as Abe mulls delay to tax hike
    No slowdown for India despite global uncertainty, Jaitley says
    Brazil’s April primary budget surplus exceeds all estimates
    Oil rises as Libya fighting flares up before OPEC meets

Maybank Weekly Bond Report - 30 May 16

Positive in the Long Run, Cautious in the Short Run


Indonesia bond market closed with a weekly gain supported by buying appetite. The increasing appetite in our view may have occurred as IGS yield seem to be attractive to certain bond investors. Yet, the incline of IGS prices was not supported by a huge volume and any economy data release as there weren’t any economic data release globally as well as domestically which could significantly move the IGS higher last week. In short, IGS prices incline in the mid of a silent market. During the week, Indonesia president met with Saudi Arabian prince as well as attended G7 meeting in Japan where he met with several delegates and Japan officials. He encourages FDI from both of the country to Indonesia. The result seems to be positive as these officials and delegates have the same intention with the Indonesian President. Bi-weekly conventional auction was conducted by DMO last week which received Rp14.7 tn while DMO awarded Rp10.0 bids.
Total trading volume at secondary market for the government segment was noted thin amounting Rp53.92 tn during last week with FR0056 (10y benchmark series) as the most actively traded. On the corporate segment, total trading volume was noted moderate amounting Rp4.18 tn with STTP01ACN2 (Shelf registration I Siantar Top Phase II Year 2016; A serial bond; Maturity date: 21 May 2017; Rating: idA) as the most actively traded bond.
Foreign ownership stood at Rp616.4 tn or 37.9% of total tradable government bond as of May 26th. Considering a 2 day’s settlement, Foreigner booked net sell worth of Rp9.19 tn within the month of May while biggest buyer during the same period was banking sector which bought Rp11.36 tn. Insurance companies was seen purchasing Rp9.41 tn due to liaising with new OJK regulation that Insurance companies should have IGS proportion approx. equal or above 20% of total investment asset.
We believe that bond market this week would be moving sideways with IGS prices to slightly decline. Bond investor in our view would be really cautious ahead of the U.S. May NFP and Unemployment data release mostly after Fed Yellen remarked that she sees the Fed to gradually and cautiously increase their overnight interest rate over time and probably in the coming months. In the short run, we do see that an increase of the FFR would impact negatively to the IGS and Indon prices. However, the negative sentiment could be offset if S&P rating agency upgrades Indonesia rating to investment grade and tax amnesty bill is passed by legislative. In the long run, we remain to believe the potential appreciation of both of the asset prices backed by expansionary monetary and fiscal policy stance taken by the local Central Bank and government respectively which would lead to higher GDP growth, lower unemployment rate and a stable inflation rate in the long run. ECB meeting will be held this week as well with consensus expecting of an unchanged of their refinancing rate. Indonesia May inflation rate will be published by Indonesia statistics this week, our house calls a monthly inflation of 0.18% MoM however yearly inflation would decline to 3.28% YoY. Expectation of a disinflation would result in IGS yield to decline. This is why we are expecting for IGS prices to move sideways this week.

May’s Industrial Output And Export Growth Eased But Retail Sales Growth Remains On Track

Economic Research
30 May 2016

Economic Highlights

Vietnam’s industrial production (IPI) growth eased marginally to 7.8% y-o-y in May, after growing +7.9% in April and compared to +6.2% in March, caused mainly by the easing in the output of manufacturing, electricity and water supply.

Economist:  Vincent Loo  | +603 9280 2172

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