As the initial excitement of positive vaccine results cools down, markets have simultaneously slowed as investors look to take profit while the money is good. The Dow slipped sub-30,000. Down 0.6% on Wednesday; the S&P 500 fell 0.2% as well despite a 0.5% rise in the NASDAQ.
The fixed income space has proven relatively stable, however, the US 10-year treasury yield remained constant at around 0.88%. As for crude oil prices, WTI crude inched above US$45.70 per barrel ($61.17) for the first time since early March while Brent prices firmed towards US$48.60 closer towards US$50. Gold was marginally lower at US$1807/ounce.
“With post-US election uncertainties receding, market’s focus will be increasingly on economic and health outcomes. Vaccine and stimulus hopes will be balanced by the EU-US slowdown in the present quarter from the coronavirus resurgence,” comment DBS FX strategist Philip Wee and rates strategist Duncan Tan in a note to investors on 26 Novemner.
In Frankfurt, the European Central Bank will likely be expanding its asset purchase programme at its 10 December meeting. The US Federal Reserve could also make some alterations to its asset purchase programs at 16 December’s Fed Open Market Committee (FOMC) meeting. “Lower US nonfarm payrolls have been pencilled in at next Friday’s jobs market after initial jobless claims rose a second consecutive week,” add Wee and Tan.
There is also bad news on the Brexit front, as the DBS duo sees a deal on the UK’s future relationship with the EU as unlikely. As the UK inches closer to the end of the Brexit transition period on 31 December, there appears no sign of any concord between 10 Downing Streer and Brussels. Both the UK and EU have projected higher unemployment into the new year.
To make matters worse for developed markets (DMs), their currencies have not deviated from pivotal levels. Wee and Tan note that the USD Index (DXY) and its largest component, the EUR, have stalled at around 0.92 and 1.19 respectively. Sterling faces significant difficulties breaching its multi-year trendline resistance at 1.34, while commodity currencies AUD and NZD have not seen significant appreciation above 0.74 and 0.70 respectively.
In contrast, Asian currencies have been consolidating. After the first week of November, the DBS strategists note that USDCNH, USDKRW, USDIDR and USDTHB have been pivoting around 6.60, 1100, 14100 and 30.3 respectively. Meanwhile, USDMYR consolidated within 4.08-4.10 in the past week. But it remains unclear if USDSGD, USDPHP and USDINR can trade below 1.34, 48.1 and 74.0 respectively.
In spite of this good news in Asian FX markets, the Covid-19 front have taken a turn for the worse as infections approach Augusy highs in South Korea and Hong Kong. Indonesia and Malaysia continue to grapple with high daily new case numbers as well. Fortunately, new infections are down in India and the Philippines and remain low in Singapore and Thailand.
“The planned Hong Kong-Singapore travel bubble has been delayed by two weeks, a reminder of the challenges to reopen borders until the vaccines prove that they can deter lockdowns and tighter restrictions, and hopefully, break the cycle the resurgences,” lament Wee and Tan.
Of interest to Asian investors are moves by Bank Indonesia (BI) and Bangko Sentral ng Pilipinas (BSP) to cut interest rates by 25 basis points. “This was noteworthy because Asia central banks had not cut rates in the four months prior (cuts were front-loaded into 1H) and swap markets did not have strong conviction for cuts to resume in Asia before year-end,” say the strategists.
While BI had hinted at rate cuts prior to its meeting, BSP’s latest action came as a surprise as the Governor was previously thought to have wanted to allow more time for earlier easing measures to take effect. The analyst also find it interesting that both Indonesian and Philippine government bond yields experience only modest declines following the rate cuts.
“Bond markets likely saw last week's cuts as being brought forward from 1H2021 due to the current supportive environment of soft USD and buoyed global risk sentiments, rather than prospects that BI and BSP's cut cycles would be deeper than expected,” comment Wee and Tan.
“We continue to emphasize that conventional policy room in Asia is close to being exhausted and incremental monetary support in 2021, if needed, will be heavily tilted towards unconventional measures such as direct deficit financing and secondary market bond purchases,” add the DBS duo.
Persistent above-target inflation in India has forced cut pricing to abruptly unwind, note the strategists. They predict that current wide spreads between Mibor/ Reserve Bank of India (RBI) reverse repo rates vis-a-vis 1-year OIS rates suggest that markets expect RBI hikes to be more likely than cuts next year.
“Banking liquidity appears to be extremely flushed, as evident by call rates that have broken outside and below RBI’s interest rate corridor. In part, this has contributed to RBI’s re-pivoting back to twist operations (liquidity-neutral) for its OMOs, from large outright purchases (liquidity-adding) in October and first half of November,” write Wee and Tan.
