Global growth projections for 2016 and 2017 have been cut by IMF, signifying sluggish productivity growth and rise in uncertainty post-Brexit.

Summary

• Global growth projections for 2016 and 2017 have been cut by IMF, signifying sluggish productivity growth and rise in uncertainty post-Brexit. Last month, IMF reported that it sees global growth in 2016 at 3.1% and 3.4% in 2017 (each markdown of 0.1 percentage points since its last forecast made in Apr).
• Risk to global growth leading to ebbing of risk appetite, and threat of further hikes by the Fed, contributed to financial market turmoil as foreign investors considered taking out portfolio investments out of EM capital and financial markets.
• US Treasuries direction to largely be influenced by Fed policy and safe haven demand amid current uncertainty. Markets are expecting the tightening shift in policy to remain at a gradual pace, but we think there should be a one-time hike before 2016 runs out. Another rate hike in 2H2016 would see upside of the 10T to 1.75% end-2016. Yield upside limited by global worries and low rates in other developed bond markets.
• As for Malaysia, we see possibility OPR ending the year at 2.75%.
• Assuming loose monetary policy support with OPR at 2.75% end-2016, 3-year MGS will remain steady to end the year near 2.90% and 10-year MGS at 3.60% though there might arise profit taking pressure in 4Q2016.
• A slant towards weakness for the Ringgit could emerge with Fed tightening move on the horizon supporting the Dollar. We expect USD/MYR at 4.2000 end-2016.
• We expect credit spreads to widen further in 2H2016, after already widening from the very tight levels seen in 2015. However, the next movement may be muted compared with the past couple of months, as we think continued low MGS yields could prompt another round of bargain hunting in the corporate bond space in 2H2016.
• We keep our target of RM87.0-87.5 billion in new supply of govvies (MGS+GII) this year.
• We raise our expectation for 2016 Ringgit corporate bond offering to around RM85.0 billion.