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Mizuho daily by Vishnu Varathan, Head, Economics & Strategy | Asia & Oceania Treasury Department | Mizuho Bank, Ltd.,
Between Stall & Wall
Some aspects of markets suggest the “risk on” mood has fizzled at the margin, begging the question of whether this is merely a case of bulls temporarily stalled or hitting a wall.
For a start, equity market bulls have stalled on Wall St, with Dow just a smidgen off, while S&P500 dipped 0.1%. Only Nasdaq eked out a 0.1% gain. Point being, with US equities very near record highs and stimulus hopes riding high, fears of the hitting a wall may be premature. Accordingly, UST bond yields a touch lower, with 10Y easing off 1.17% (30Y: 1.95%) are also apparently a stall in yield upswing amid optimism about vaccine rollout and US fiscal boost. The nuanced distinction here though is that if the Fed displays discomfort with long-end yields surging too much too soon, bond yields could hit a wall for some time. But reflation raging on in commodities is unfettered by a stall, much less a wall; with Brent Crude pushing past USD61, Copper buoyed further and iron ore elevated.
The more pertinent issues though may be with regards to the potential for, and nature of, convergence between reflation (exerting itself on inflation expectations) and yields. Such a convergence will send huge ripples across asset markets given the ramifications from a sudden inflation in real US yields from record negative levels currently. And the USD may be particularly sensitive to this. But right now, in the absence of real yield cues for the USD one way or another, the question is whether resurgent USD bulls have temporarily stalled or more durably hit a wall.
This is evident in the sharp manner in which USD has reversed all gains since end-Jan; leaving EUR back above 1.21; AUD above 0.77, potentially heading for 0.78; USD/JPY sliding from mid-105 to mid-104 and; USD/SGD also off high-1.33 to mid-1.32. It may be too early to declare one way or another. But Beijing’s substantial Jan credit push allaying concerns of premature tightening may revive “risk on”; and for now, dampen the USD.
Malaysia Q4 GDP: Sequential Stall
Tomorrow’s data release will probably show Malaysia’s Q4 GDP contracting ~2.8% YoY; at levels unchanged from Q3. The sequential stall reflecting renewed Covid outbreak (requiring re-imposed restrictions) and validating need for extended fiscal/monetary accommodation. On the supply-side, improved farm output, led by palm, will partly offset deeper contraction in the all other key sectors (manufacturing, services and construction); with activity having been impeded by a renewed wave of Covid-19 infections from end-September.
The demand-side dent reflecting private sector consumption and investments compromised amid confidence deficit. And government spending to buffer households and businesses may mitigate but not fully offset; while progress on public sector investment probably slowed. Worryingly, Q4 weakness is not merely backward-looking as spill-over impact from wider MCO alongside State of Emergency declared darken growth prospects for Q1 2021 as well.
Point being, insofar that lasting improvement to growth hinges on a credible vaccine distribution program, details of which are still sketchy, the recovery path is rendered bumpy. The government’s supportive 2021 budget 2021 is welcome as fiscal policy is required to play a bigger role in propping up growth as further BNM^ rate cuts may be measured (25-50bp). Moreover, the BNM’s role in emphatic credit and liquidity support are most effective in conjunction with targeted fiscal measures to alleviate private sector demand deficit.
Source Credit: Mizuho Bank Ltd
