Asia Rates: Asia bonds and US elections
We are optimistic that Asia Government Bonds would generally be well placed to weather any storm arising from election developments. In our view, the COVID-19 pandemic, in four indirect ways, has led to a broad improvement in the "shock-absorbing" fundamentals of Asia bonds. To start off, one of key regional trends in 2020 has been in external funding and BOP - Import compression against export, due to still-weak domestic demand from pandemic drags, has created stronger trade balances, which in turn helps to support the current account (CA). Two of Asia's typically CA-deficit economies, Philippines and India, are now expected to turn in surpluses this year (IMF WEO, Oct 2020). The other, Indonesia, is expected to see its deficit halve from 2.7 to 1.3% of GDP. The usually CA-surplus economies, such as Singapore and Thailand, are expected to see slight declines, but still stay comfortably in surplus. A second key trend has been an across-the-board rise in FX reserves - Across the region, increase has averaged USD26bn in notional terms and 8.2% in percentage terms. While some portion of the increase could be attributable to valuation gains from weaker USD, Asian central banks likely took advantage of the Fed's easing of global USD liquidity (in response to the pandemic) to build FX reserves.
In response to the pandemic, we have also seen Asian central banks rapidly expand their balance sheets to inject liquidity and ease financial conditions. However, loans/credit growth has been subdued so far. As a result, banking system liquidity has gotten quite flushed, as seen by money market rates declining relative to policy rates/rate corridors (China is the only exception). All this flush liquidity supports banks' demand for bonds and acts as a strong anchor for yields, especially the shorter tenors.
The pandemic has given legitimacy to the bond-buying capabilities of Asian central banks (and larger EM). Whether it is in the name of market stabilization or in the case of Philippines, India and Indonesia, to support government financing, markets are likely to be tolerant of Asian central banks buying more bonds to smooth election-driven volatility. Therefore, we think possible volatility in Asia bonds post 3 November, is more likely to be orderly, rather than disruptive.
FX Daily: USD and stimulus; GBP and Brexit
US stock investors appear to have become sceptical about the chance of a US stimulus bill before the US elections on 3 November. Overnight, the USD Index (DXY) closed below 93 for the first time since 18 September. The US 10Y bond yield increased to 0.82%, a four-month high. The Dow, however, opened higher for a second day only to fall for the rest of session. Unlike Tuesday, the Dow did not close higher but ended 0.4% lower yesterday. Sentiment is likely to turn defensive of the second US presidential debate (tomorrow morning in Singapore). DXY is likely to be supported around 92.5 after four days of sell-off.
The White House and House Democrats have moved closer towards a stimulus deal around USD2tn but doubts persist over the 60 votes needed in the Senate to pass the bill. The Republicans hold a 53-47 majority in the Senate. Although markets have pivoted towards a Blue Wave election outcome, some asset managers have become wary about taking big directional bets due to the tight race to control the Senate. Of the 35 seats to be contested this year, 12 are too close to call.
GBPUSD has appreciated to 1.3150 on Wednesday, its highest levels since early September. EU and UK have agreed to resume talks with the aim of inking a Brexit deal by mid-November. There are, however, no guarantees that back and forth negotiations will be avoided in this “final” phase. Both sides will need to make concessions especially in three contentious issues – fishing rights, the settlement of disputes and the level-playing field. EU has maintained that the level of UK’s access to the single market will still require some compromise on UK’s sovereignty. Both sides understand the need for a deal but not at any costs. Either side could still walk away. For now, GBPUSD has probably moved into a higher range between 1.30 and 1.32.
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