Thursday, June 30, 2016

MY Fixed Income Outlook 2H2016: Rate Cut Hope Underpins Rally

·         MGS curve bull-flattened as risk sentiment improves and market starts building up its expectation for a cut in July's MPC meeting.
·         Supply profile is mildly positive in 3Q16 on potential reinvestment demand from large MGS maturity, but not a major catalyst as we expect some rollover demand to be met via adhoc issuance of BNM notes.
·         Overall, domestic factors are supportive of a mild strengthening of MGS. Our target yield for the 10y MGS yield is revised down to 3.65% by end-3Q16 with a view that OPR cut to materialise in 3Q16 and the deferral of FFR hike to 1H2017.

Results Note � Gamuda (BUY, maintain)

Top Calls

Results Note Gamuda (BUY, maintain)

- Better earnings visibility

s 3QFY16 results were in line with expectations. Net profit fell 10% yoy to RM474m for 9MFY16 on lower construction and property earnings. We believe earnings will bottom in FY16 and rebound in FY17 as the RM30bn Klang Valley MRT Line 2 (MRT2) project starts to contribute earnings. Securing the project has improved earnings visibility over the six-year construction period. Gamuda is among our market and sector top BUYs with RNAV-based target price of RM5.70.

Other Calls

Results Note HAI-O (SELL, maintain)

- MLM division rises among weaker divisions

For important disclosures, please refer to the Disclosure section at the end of the individual linked research reports.

Strategy : Malaysia: ‘Noise’ vs. ‘Substance’ to influence investors

Strategy : Malaysia: ‘Noise’ vs. ‘Substance’ to influence investors

The BREXIT vote turned out to be a major surprise for investors. The decision flared up uncertainty which we expect will remain high for some time. We do not have the answer on what will happen next, apart from merely postulating. The reason being, there are numerous aspects of the upcoming exit negotiations and we are unable to work on an 'ideal' scenario. We believe investors will eventually have to focus on ‘substance’ and not on ‘noise’. By doing so, we believe Asia ex-Japan markets have opportunities since (1) equity valuation is still attractive reflected by the MSCI Asia ex-Japan price/book ratio which although is still below the long-term trend; (2) macro growth in this region is still better than many advanced economies; (3) country risk assessment shows the countries under our coverage exhibits ‘low-moderate’; (4) most Asian market government bond yields exceeds most of the major global government bond yields; and (5) regional Asian markets have’ low-medium’ correlation and in some cases negative, implying that ‘stock-to-stock correlation’ on a broad perspective is also ‘low-medium’.

Looking at KLCI, our end-2016 KLCI target is pegged at 1,680 based on 16.8x P/E. We expect the market to be sideways driven by the ongoing uncertainties. We think the downside is fairly limited given the low foreign shareholding exposure. Underpinned by our conservative outlook added with moderate GDP growth of 4.0% for 2016, we prefer to focus on sectors that can offer good value and/or visible medium term growth. Hence, construction (Gamuda, IJM, Econpile and Kimlun), power (TNB), malt liquor (Heineken Malaysia)and timber (Jaya Tiasa, Ta Ann) are the sectors of our preference. Besides, we think investors’ appetite will still be on fixed income supported by (1) post-BREXIT worries will see investors seeking opportunities in this region and we expect Malaysia to be in the radar screen; (2) expectation of the monetary policy easing in the advanced countries will entice investors to look at Asian ex-Japan whose yields on average is about 3%; and (3) overall GDP growth in Asian ex-Japan is still higher than advanced countries. On that note we expect our 10-year MGS yield to average around 3.71% for 2016 (4.06% in 2015).

Others :
Maxis : RM10bil sukuk programme for refinancing and capex      HOLD

MSM Malaysia : Hike in gas tariff again   HOLD
Rubber Gloves : 6% higher natural gas tariff beginning 15 July 2016           NNEUTRAL

US : Expect weaker spending going forward

Malaysia Airports Holdings : Shares affected by Istanbul incident
Gamuda : Q3 earnings down slightly on soft property market
Property Sector : S P Setia still positive on Battersea despite Brexit
IJM Corp : IJM feels impact due to forex translation

The information and opinions in this report were prepared by AmInvestment Bank Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmInvestment Bank Bhd. Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmBank Group Bhd and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice.


UK PM David Cameron told Labour Chief to go. A new PM will be announced on 2 Sep.

*      UK PM David Cameron told Labour Chief to go. A new PM will be announced on 2 Sep. Risk aversion dissipated as markets started to expect monetary easing by central banks around the world, including the BOE. GBP was lifted above the 1.35-figure at one point before easing under the handle by early Asia. The sense of optimism was so strong, not even weaker-than-expected US person income and pending home sales dented stock gains. Equity indices clocked a second session of gains overnight and Asian stocks are likely to follow suit according to the futures. Meanwhile, 31 banks passed the Fed’s annual stress tests except Deutsche Bank AG and Banco Santander SA.
*      News of PBOC in the offshore yuan markets dragged the USDCNH under the 6.66-figure, providing even further anchors to the rest of the USDAXJs. USDJPY was last seen around 102.80 after briefly touching the 103 handle. Buoyant risk sentiments extended beyond North Asi. The Indian Cabinet approved the 7th pay panel recommendation, allowing central government employees to get a substantial hike in pay & allowance. The potential boost to private consumption was enough to set the SENSEX on rally and pushed the USDINR under the 67.70-level.
*      Day ahead has a few events of note in the region. CBC could be the first central bank to ease after Brexit. While there were already expectations for them to shave 12.5bps off their benchmarket interest rate before the event, a move at this time could add to the risk-on mood in the market. Elsewhere, Philippines’ President-elect Dutarte would be sworn in today. Thailand exports and BoP Current Account balance are due. Expect relief rallies to be short-lived and further whippy trades ahead.  

   G7 Currencies
*      DXY – Supported on Dips. Dollar index drifted lower as markets shrugged off Brexit scare. DXY was last seen at 95.70 levels. Daily technicals suggest dollar index remains supported. Shorter term technical suggest that the index could see some pullback. Support at 95.80 (50% fibo) before 95.20 (100 DMA). Key resistance at 96.50 (200 DMA). Only a break above on daily close basis could see an extension of the rally towards 97.96 (76.4% fibo retracement of 2016 high to low). In overnight data, personal spending was up while pending home sales was down. Fed’s stress test (part 2) conditionally passed Morgan Stanley but requires the investment bank to show they have enough capital to cover a downturn and they have to show the Fed that they have the processes in place to assess what losses they might have if things get bad. MS has up to end of 2016 to resubmit its plan or will be barred from paying dividends in the future. The US units of Deutsche and Banco Santander failed the stress test. Week remaining brings Chicago Purchasing Manager (Jun) on Thu; ISM Mfg, PMI (Jun) on Fri.
*      EURUSD – Sell on Rallies. EUR remains on a drift higher amid USD pullback. Last seen around 1.11 levels. We retain our call to sell EUR on rallies towards our sell-zone of 1.1100 (200 DMA) -  1.1150 levels for a move back below 1.10-handle. Daily momentum remains bearish bias; 4-houly stochastics in nearing overbought conditions. Resistance at 1.11 (200 DMA), 1.1230 (100 DMA). Support at 1.0940 (61.8% Fibonacci retracement of Dec low to May high), 1.0780 (76.4% fibo). Week remaining brings ECPI estimate/ core (Jun) on Thu; EC Mfg PMI (Jun); Unemployment rate May) on Fri.
*      GBPUSD – 1Q GDP on Tap; Political Headlines to Drive Direction. GBP-short squeeze continues as the pair shrugged of post-Brexit blues to trade as high as 1.3534 amid thin liquidity. We do not rule out further short squeeze but prefer to sell on rally as uncertainty on separation remains. GBP was last seen at 1.3430 at time of writing. Daily momentum remained bearish and GBP could test lower towards 1.30-handle. But 4-hourly momentum suggests upside squeeze could continue towards 1.3570 (23.7% fibo retracement of that 2 day decline of 1.5018 – 1.3121), 1.3840 (38.2% fibo). Week remaining brings GDP (1Q); Business Investment (1Q) on Thu; PMi Mfg (Jun); Unit labor cost (1Q) on Fri.

*      USDJPY – Range. USDJPY is a tad softer after breaching the 103-handle briefly this morning, as investors took advantage of any moves in either direction to take profit. However, further downside could be limited as the worse-than-expected drop in industrial production (May P: -0.1%; cons.: +1.9%; Apr: -3.3%) could reignite expectations of further BOJ easing measures. Pair was last seen around 102.80 levels. Daily momentum shows bearish bias remains intact but waning and stochastics continues to climb higher from oversold levels. Pair should continue to hover within its current trench channel. Support is at 101.95 (23.6% Fibo retracement of May-Jun downswing); 101.90 (lower bound of the trench channel). Further reduction in confidence in Abenomics could see a move towards the 95-handle. Upticks should meet resistance around 103.80 (38.2% Fibo). Continue to expect 101-105 to hold intraday with bias still to sell on rallies. May jobless rate, May CPI, 2Q Tankan Survey results, Jun final Nikkei PMI Mfg are on tap tomorrow.
*      NZDUSD – Tactical Sell. NZD inched higher amid USD pullback and easing of Brexit fears. ANZ Business confidence rose in May, to its highest level since Dec 2015. NZD was last seen around 0.7105 levels. Daily momentum remains mild bearish bias. 4-hourly stochastics is nearing overbought conditions. Suggest selling on rallies towards 0.7130 for a move towards 0.70-handle. Some technical levels to watch – support at 0.7030 (21 DMA), 0.6930 (50% fibo retracement of May-2015 high to Aug-2015 low). Resistance at 0.7130 (61.8% fibo), 0.7360 (76.4% fibo).
*      AUDUSD – Beware of Profit Takers. AUDUSD surged above 0.7460 on positive risk sentiments. Despite the morning rebound, momentum indicators are suggesting waning bullish momentum. Next barrier is seen around 0.7505 (9 Jun high). We are wary of profit-taking amid underlying caution that pulled the AUDUSD back towards support at 0.7286 (200-DMA). May private sector credit is due today. The 2016 Federal Elections is eyed on Sat and opinion polls show that the race is still tight with only a marginal lead by the Coalition. A Labor party win could put Australia’s AAA rating at risk as they are likely to allow greater deficit in the next four years before its projected balance budget by 2020/2021.
*      USDCAD – Softening Within Range. USDCAD backed away from the 100-DMA and was last seen around 1.2940. First support to break is seen around 1.2880 (21,50 DMA). The convergence of the two moving averages suggest more range-trading ahead. Stochastics indicate room on both sides and MACD is mildly positive. The 200-DMA at 1.3329 which is near the 38.2% Fibonacci retracement of the Jan-May sell off acts as a further deterrence for aggressive bulls. Oil prices have been pretty resilient and that has given some support to the CAD. Apr GDP is due tonight. Consensus expects a mild print of 0.1%m/m vs previous -0.2%. Year-on-year, growth should quicken to 1.4% from previous 1.1%. In separate news, visitor spending rose 11%y/y for 1Q, underpinned by the cheaper CAD.
Asia ex Japan Currencies
*      The SGD NEER trades 0.97% above the implied mid-point of 1.3621 with the top estimated at 1.3351 and the floor at 1.3891.
*      USDSGD - Buy On Dips.  USDSGD is little changed after slipping lower for the past two sessions as Brexit concerns begin to fade. Pair broke below the 1.35-handle yesterday and has remained there since. Still, the pair is only half-way to retracing to where it was at before Brexit occurred. Pair was last seen at 1.3780 levels. Daily momentum and stochastics continue to point to mild upside risk. We remain bias to buy on dips at current levels, looking for a move towards 1.3640 (61.8% Fibo retracement of the May-Jun downswing); 1.3680 (100DMA) before 1.3720 (76.4% Fibo retracement).
*      AUDSGD - Choppy. AUDSGD hovered around 1.0050, a tad firmer than before. AUD and SGD bulls continue their tug of war, resulting in little directional bias. MACD shows little directional bias with stoch almost entering overbought conditions. Barrier is still seen at 1.0124 before 1.0221. Moves have been choppy and will still be. Support is seen at 0.9900 (76.4% Fibonacci retracement of the Jan-Apr rally) before 0.9720.
*      SGDMYR – Bearish Momentum. SGDMYR fell  amid MYR outperformance; last seen around 2.98 levels. Daily momentum is mild bearish bias. We reiterate our bias to lean against strength. Next support at 2.9720 (50 DMA) before 2.9570 (38.2% fibo, 100 DMA). Resistance at 3.0150 (21 DMA), before 3.0480 (trend-line resistance from the highs of Nov and Jan) and 3.0640 (76.4% fibo retracement of Oct high to Apr low).
*      USDMYR– Cautious of Short-Term Rebound Here. USDMYR gapped lower in the open, tracking gains in oil prices, USD pullback as post-Brexit fears abated. Pair was last seen at 4.0180 levels. Momentum remains bearish bias but 4-houly stochastics indicate the pair is at near oversold conditions. The break of support at 4.04 (50 DMA) puts next support at 3.9850 (23.6% fibo retracement of 2016 high to low). Cautious of rebound here. Resistance at 4.05 (100 DMA),  4.0760 (21 DMA). Week remaining brings Jun PMI and May trade data (Fri).
*      1s USDKRW NDF – Range-Bound. 1s KRW fell amid another session of recovery in sentiment over while USD pulled back. May IP data (released early morning) surprised to the upside. Note that this was a sharp rebound from prior month of -1.3%. Pair was seen around 1154 levels. Daily and 4-hourly momentum remains mild bearish bias but 4-hourly stochastics is at oversold conditions. Could see a bounce intra-day. See range of 1150 – 1160 intra-day. Week remaining brings Jun PMI, CPI, trade as well as May current account balance (Fri). The government yesterday announced KRW20tn of fiscal stimulus package including KRW10tn of extra budget while BoK was said to provide more than KRW3tn of short term liquidity this week via OMO, following Brexit event.
*      USDCNH – Softer. Intervention dragged the USDCNH to levels around 6.6550. Barrier at 6.6820 is still intact. Interestingly, CNY is also weakening trade-weighted wise. Risk-on mood may see this pair trade within the 6.63-6.68 range. USDCNY was fixed 12 pips lower at 6.6312 (vs. previous 6.6324). CNYMYR was fixed 58 pips lower at 0.6051 (vs. previous 0.6108). Week ahead has BOP current account balance for 1Q today and then PMI-mfg, non-mfg and Caixin’s PMI-mfg on Fri. We continue to expect PBOC to use adhoc measures like pledged supplementary lending, medium term lending facility and standing lending facility to supply credit to the targeted sectors that require more liquidity support. Post-Brexit fears may build case for broad based RRR cuts but doing so may generate flows to assets that are prone to bubbles (real estate in the tier-one property sectors), undo deleveraging efforts in the economy and unhinge the CNY. China’s Beige Book showed some strength in the services and construction sector. According to New York-based research group CBB international, services revenue, hiring, capex and profits have rose from a poor first quarter. However, output, new domestic orders, receivables and payables weakened compared to a year ago.
*      SGDCNH – Expect Further Upside To Be A Grind. SGDCNH remained elevated, last seen around 4.9382. Risk recovery has swung the SGDCNH back on the uptrend but momentum indicators continue to wane. Stochastics are showing signs of falling from overbought levels so we prefer to lean against its strength. Barrier is still seen around 4.9151 before 4.9420. Pullbacks to meet support at 4.8827 before 4.8400. Both have been tested before. 50-DMA is the next support at 4.8205 to watch.
*      MYRCNH – Still In Uptrend. This cross hovered around 1.658, extending its upmove. Support is still seen at 1.6152 (100-DMA) before the 1.5987 (the lower bound of the upward sloping trend channel).  Barrier is tentatively at Fri high of 1.6649 before the next at 1.6800 (76.4% Fibonacci retracement of the 2015 sell-off, close towards Apr high) before 1.7155.
*      1s USDINR NDF – Back Into Range. The 1M NDF hovered around 67.90, weighed by a sense of optimism after the Cabinet approved the pay hike for central government employees. Other noteworthy news include the confirmation of Monsoon Parliament to commence on 18 Jul to 12 Aug, a cabinet reshuffle likely next week. The pullback in USDINR 1M NDF has quelled bullish momentum. The barrier at 68.3656 (23.6% Fibonacci retracement of the Oct-Feb 2015 rally) is still intact before the next at 69.43. Support is seen at 67.4850. Outflows may take a pause now. Investors sold USD31.7mn of equity and bought USD64.8mn of debt on 28 Jun. No tier one data due expect PMI-mfg for Jun on Fri.
*      1s USDIDR NDF – Capped. After sliding for the past three sessions, 1s USDIDR NDF is on the uptick this morning on possible profit-taking activities. 1s NDF was last seen around 13210 levels. Daily momentum and stochastics are bearish bias, suggesting risks remains to the downside. Upmoves today could thus be capped around 13280 (23.6% Fibo retracement of the Jan-Mar downswing); 13360 (100DMA). New support is at 13110 levels (23 Jun low); 13000-figure (year’s low on 17 Mar). Expect 13000-13400 range to hold still intraday. The JISDOR was fixed lower again at 13166 yesterday from 13256 on Tue. Investors remained positive on equities yesterday with foreign funds buying USD131.01mn – a level not seen since Feb - yesterday. They had however removed IDR2.16tn from their outstanding holding of government debt on 28 Jun. Jun Nikkei PMI Mfg, Jun CPI are due tomorrow.
*      1s USDPHP NDF - Mild Upside Ahead Of New President’s Swearing-In.  1s USDPHP NDF is back on the uptick above the 47-figure, possibly taking profit after being on the slide in the past two sessions. 1s NDF was last seen around 47.05 levels. Momentum indicators still show bullish bias intact with stochastics still at overbought levels. This suggests the potential for further rebounds ahead. Further upticks should meet resistance around 47.20 (50% Fibo retracement of the Jan-Mar downswing). Support remains at 46.870 (38.2% Fibo). Expect range trades within 46.750-47.400 to hold intraday and we favour buying on dips. Risks were somewhat supported yesterday with foreign funds buying USD8.27mn in equities yesterday. We have the inauguration of president-elect Rodrigo Duterte, who starts his term of office at 12 noon today.
*      USDTHB - Range-Bound.  Like its regional peers, USDTHB is on the uptick after being on the slide for the past three sessions, likely on profit-taking activities. Last seen around 35.200 levels, pair has lost most of its bearish momentum, though stochastics is showing tentative signs of turning lower. The mixed signals suggests that range trading within 35.100-35.500 is likely ahead. Immediate resistance is at 35.250 (21DMA); 35.320 (50DMA); 35.370 (38.2% retracement of the Jan-Mar downswing). Support at 35-figure. Risk sentiment was mixed yesterday with foreign investors selling THB0.29bn in equities buy buying THB17.76bn in government debt. We have 24 Jun foreign reserves, May trade, May current account due today and Jun CPI tomorrow. Onshore markets are closed tomorrow for the mid-year holiday (bank holiday) though government offices will remain open.

*      MGS saw continued buying with the whole yield curve moving down 2-7bps as the 30y MGS 3/46 reopening auction saw a strong bid cover of 2.37x, with heavy participation from end investors. Trading volume was good with 10y MGII 9/26 posting MYR1.3b of trades done.
*      IRS was initially lower anticipating a lower KLIBOR fixing and strong MGS buying momentum. But market was fairly balanced on receiving and paying interests, and 3M KLIBOR was unchanged at 3.65%. 2y IRS traded at 3.49%, 3y at 3.51% and 5y at 3.59% and 3.58%. Market appears to have fully priced in a 25bps rate cut.
*      Better bidding was seen in PDS market. AAA papers at the belly and long end were taken on the offer side for names like Plus and Rantau. Plus 30 and 31 tightened 4bps to 4.64% (G+67bps/Z+63bps) and 4.69% (G+64bps/ Z+66bps) respectively. Credit spreads seem attractive here at the belly and long end. Front end was rather muted and traded 1bp wider on Aman 19s. GG curve’s belly tightened 2-3bps while the long end tightened 3-4bps with names like PASB, Dana, Prasa and SME being traded. AA curve was unchanged to wider except for SEB 36s which tightened 5bps.

*      SGS opened lackluster seeing the usual sporadic buying and selling. Later, buying in short dated SGD forwards spurred selling of SGS, which gapped up 2-3bps in yields amid thin PD liquidity. PDs shaded lower aggressively, but bottom picking provided some support. SGS yields ended 1-2bps higher, and SGD IRS closed 1-3bps higher.
*      For Asian credits, RMs were aggressively seeking bonds. Asian CDS fell significantly with Malaysia the top performer, dropping 10pts. This led the MALAY and PETRONAS curves rallying 10-12bps. We think there was short squeeze on top of RM buying. India and China IGs tightened 7-12bps on short covering amid low liquidity. INDON sovereigns and ROPs also tightened, trading 1.0-1.25points higher.

*      Indonesia bond market closed higher supported by continuation of positive sentiment on the Tax Amnesty bill which was passed by legislative the day before. The bill is expected to bring in inflows to the bond market as well as contribute to the state revenue. However, some profits taking were seen during the day. 5-yr, 10-yr, 15-yr and 20-yr benchmark series yield stood at 7.277%, 7.418%, 7.645% and 7.692% while 2y yield shifts higher to 7.213%. Trading volume at secondary market was seen heavy at government segments amounting Rp22,497 bn with FR0056 as the most tradable bond. FR0056 total trading volume amounting Rp4,088 bn with 119x transaction frequency and closed at 106.75 yielding 7.418%.
*      Corporate bond trading traded heavy amounting Rp1,114 bn. ADMF03BCN3 (Shelf Registration III Adira Finance Phase III Year 2016; B serial bond; Rating: idAAA) was the top actively traded corporate bond with total trading volume amounted Rp262 bn yielding 8.692%.
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