Macro Strategy: Asia bonds and US elections; USD and stimulus talks

Mixed ahead of second US presidential debate.
Duncan Tan, Philip Wee22 Oct 2020
    Photo credit: Unsplash Photo

    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.

    Duncan Tan

    FX and Rates Strategist - Asean

    Philip Wee

    FX Strategist - G3 & Asia

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.

    PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.