Tuesday, 23 March, 2021 [email protected]

Global Economics & Markets Research Email: [email protected] URL: www.uob.com.sg/research

Markets Overview

HIGHLIGHTS AHEAD

. Attention this evening will be on US Chairman Powell and Treasury Secretary who are scheduled to make their first joint appearance before the US House Financial Services committee to testify on Fed and Treasury pandemic policies. Then on Wednesday (24 Mar), both Powell and Yellen will take part in a remote hearing before the Senate Banking Committee on the quarterly CARES Act report to Congress. Powell is likely to reiterate that the recovery is gaining steam and there’s still a long way to go, while the Fed plans to support for the recovery "for as long as its takes" as the economy remains below pre-pandemic levels, according to the release of his prepared testimony to Congress on Tuesday.

. For the day ahead, data releases include Richmond Fed manufacturing index for Mar (Bloomberg Est 15 from 14 in Feb).

. The Asian docket today is relatively sparse, and will include Singapore’s February CPI data at 1pm SGT, where market estimates pencil a year-on-year increase of 0.6% (+0.4% m/m nsa). Taiwan is also slated to release its industrial production data for February 2021, where estimates point at a growth of 7.7% y/y, up from January’s surge of +18.8% y/y.

CENTRAL BANK OUTLOOK

. US Federal Reserve Chairman said Monday that cryptocurrencies remain an unstable store of value and the is no hurry to introduce a competitor. “They’re highly volatile and therefore not really useful stores of value and they’re not backed by anything,” Powell said during a virtual panel discussion on digital banking hosted by the Bank for International Settlements. “It’s more a speculative asset that’s essentially a substitute for gold rather than for the dollar.”

. Richmond Federal Reserve President Thomas Barkin on Monday said he doesn’t believe the US economy is anywhere near the bar the central bank set before it will begin to even consider pulling back on its bond-buying program. These comments echo those of Fed Chair Jerome Powell, who said last week that it’s not time to even start talking about pulling back on bond purchases despite Fed policymaker forecasts for the fastest US growth in decades this year. Barkin noted that the Fed’s preferred measure of inflation, core PCE, was 1.4% in December when the central bank set its bar for reducing quantitative easing, well short of the Fed’s 2% goal. And while unemployment has dropped to 6.2%, broader measures of the job market suggest plenty of slack.

. The German economy is likely to shrink sharply this quarter as pandemic-fighting curbs hit the services sector and even the booming construction industry slows, the Bundesbank said on Monday. In its latest monthly report, the German central bank seemed to abandon its expectations of a rebound in the spring and dropped references to the vaccination campaign, which has been beset by delivery delays and news reports of possible side-effects, as a catalyst.

FX

. The US dollar index (DXY) fell from four-month highs on Monday, tracking the dip in US Treasury yields. After gaining in response to the development in Turkey and a plunge in the Turkish lira earlier on Monday, the DXY settled lower by 0.2% to 91.742, following last week’s gain of 0.3%. EUR/USD rose 0.3% at 1.1935. The USD/JPY eased 0.1% to 108.79, after dropping to 108.51, the lowest since 12 March. The AUD/USD rose 0.2% to 0.7754 and NZD/USD gained 0.2% to 0.7177 on Monday.

. Asian FX were somewhat flat given a rather uneventful day yesterday. The Asian dollar index fell marginally by 0.03%, dragged by THB (-0.21%). MYR (-0.13%) and VND (-0.02%). On the flipside, gainers which appreciated against the greenback included the KRW (+0.23%), INR (+0.19%), PHP (+0.12%) and SGD (+0.06%).

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EQUITIES

. The S&P 500 closed near record highs Monday after 2 days of losing streak, led by tech as investor appetite for growth stocks returned in the wake of a pullback in US bond yields. The Dow added 0.31%, or 102 points, the S&P 500 was up 0.70% to 3,940.42 just about 1% off its record closing high. The Nasdaq Composite gained 1.23% on Monday, for its fifth positive session in six.

. Asian equities were mixed at yesterday’s closing, with the MSCI Asia Ex-Japan index marginally higher by 0.1%. Bourses that rose included SH COMP (+1.1%), TWSE (+0.7%), SET (+0.2%) and HCM (+0.03%), while other equities including JCI (-0.9%), PSE (-0.6%), KLCI (-0.6%), Hang Seng Index (-0.4%) and STI (-0.2%) fell.

US TREASURIES/BONDS

. The US 10-Year yield closed below 1.7% on Monday, following a surge to 14-month highs to 1.75% last week, driven by technical factors that analysts say pushed rates too high too fast and will likely continue to subside while the developing crisis in Turkey boosted appeal for safe haven assets. 10-year Treasury note eased 4.1bps to 1.684%, while 30-year Treasury yield slipped to 2.379%, after jumping above 2.5% last week.

. Government bond yields were largely lower in the major Asian economies. In the 2y- space, yields were lower in Malaysia (- 3.1bps), Thailand (-2.1bps), and India (-2.1bps), while higher in South Korea (+1.8bps). In the 10y- space, yields fell in Taiwan (-8.4bps), South Korea (-6.5bps) and Vietnam (-3.1bps), and rose in Singapore (+2.1bps). The iTraxx Asia ex-Japan investment- grade CDS rose 11.23%. Government bond issuance schedule for today will include South Korea’s 20y- bonds, Hong Kong’s 91d- and 183d- bills, and Philippines’ 10y- bonds.

COMMODITIES

. Oil held steady on Monday as hopes for a pick-up in demand later this year helped arrest last week’s broad sell-off, but prices stayed under pressure as parts of Europe go into lockdowns amidst another wave of infections. Brent crude was up 6 cents or 0.1% to $64.59 a barrel, while US WTI gained 13 cents to settle at $61.55 per barrel. Both benchmark prices fell more than 6% last week after making steady gains for months on the back of output cuts and an expected demand recovery.

. Spot gold fell 0.3% at $1,738.93/oz on Monday, with a dip in the US dollar and US Treasury yields offering little respite.

ECONOMIC NEWS & DATA

. Most regions of the globe are seeing an increase in new Covid-19 cases as highly contagious variants continue to spread, the World Health Organization (WHO) said Monday. New cases worldwide increased by 8% over the last week, the fifth week in a row that the WHO has seen an increase in transmission, Maria Van Kerkhove, WHO's technical lead for Covid-19, told reporters on Monday. Cases in Europe, where the highly contagious B.1.1.7 variant is rapidly spreading, increased by 12%, Van Kerkhove said. The WHO has also seen a 49% increase in cases in the Southeast Asia region, an 8% increase in the Eastern Mediterranean region and a 29% increase in the Western Pacific region, driven by an increase in infections in the Philippines and Papua New Guinea, she said.

. US home sales dropped to a six-month low in February amid cold weather in many parts of the country and record low supply, and a rebound could be muted by rising mortgage rates as well as higher house prices. Existing home sales dropped 6.6% to a seasonally adjusted annual rate of 6.22 million units last month, the lowest level since last August, far lower than market expectation of a 3.0% decline to a rate of 6.50 million units.

. US on Monday imposed sanctions against two Chinese officials over alleged human rights abuses. The move came as the European Union, the UK and Canada took similar action against China.

. Germany is set to continue massive deficit-spending in the COVID-19 pandemic with a debt-financed supplementary budget of some 60 billion euros for this year and a 2022 draft budget with net new debt of 81.5 billion euros, Reuters reported on Monday. The government’s revised budget plans are pushing up pandemic-related new borrowing to a record 240 billion euros this year following some 130 billions euros in 2020, the finance ministry document showed. This means that Germany’s overall pandemic- related net new debt could exceed 450 billion euros from 2020 to 2022.

. French vaccination chief Alain Fischer said on Monday he expects the country to return to some kind of "normal" living conditions by summer or autumn thanks to an acceleration of the COVID-19 vaccination campaign. Fischer also said the army would be involved in plans to speed the vaccination campaign and that France was still able to stick to its vaccination targets despite setbacks on the AstraZeneca vaccine.

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. Russian Foreign Minister Sergei Lavrov began a visit to China on Monday with a call for Moscow and Beijing to reduce their dependence on the US dollar and Western payment systems to push back against what he called the West’s ideological agenda. Lavrov, on a two-day visit to China, is expected to hold talks with his Chinese counterpart at a time when both countries' ties with the administration of US President Joe Biden are badly strained.

. New Zealand is set to unveil measures on Tuesday to counter a rampant rise in property prices that has pushed younger and lower income buyers out of the market, and poses a major challenge for the government of Prime Minister Jacinda Ardern. The country’s success in combating the coronavirus has made it a safe haven for returning Kiwis and investors, who have parked their funds in real estate, pushing house prices up 23% in just 12 months, far ahead of wage growth, according to a Reuters report on Monday.

. The Monetary Authority of Singapore (MAS) will likely hold its monetary policy meeting in the period between 8 and 14 April 2021. While we recognise Singapore’s upside growth potential and the possibility of higher inflation risks in 2021, we keep to our base case for MAS to keep policy parameters unchanged in April. This means that will likely be no change to the gradient and width of the policy band, as well as the level at which it is centred. For more details, please read our Singapore MAS Preview report (22 March 2021).

. In its latest report on Indonesia, Fitch Solutions expect Bank Indonesia (BI) to cut its benchmark rate by a total of 50 basis points in 2021. Note that BI left its benchmark rate unchanged at 3.50% at its March 2021 monetary policy meeting, and maintained the Deposit Facility rate and Lending Facility rate at 2.75% and 4.25% respectively. Despite Fitch’s view, we keep our BI rate forecast at 3.50% for the rest of the year. BI will remain accommodative via other monetary, macroprudential, and liquidity supporting measures to further support national economic recovery.

. Malaysia’s foreign reserves rose to US$109.2 billion for the week ended 15 March 2021, up from the previous week’s US$109.0 billion handle. According to Bank Negara Malaysia (BNM), the foreign reserves is sufficient to finance 8.5 months. of retained imports and is 1.2 times short-term external debt.

. The People’s Bank of China (PBoC) kept its Loan Prime Rate (LPR) unchanged with the 1Y LPR and the 5Y & above LPR set at 3.85% and 4.65% respectively. This is the 11th straight month that the central bank held rates steady after its last cut in April 2020. The move is in line with PBoC’s decision to keep its 1Y medium-term lending facility (MLF) rate which the LPR is pegged to, unchanged at 2.95% last Monday (15 March). For more details, please read our report.

. Separately, PBOC Governor Yi Gang commented that government funds will only cover a “fraction” of China’s green financing investment, and the market is “encouraged” to make up the difference. The green financing investment is an endeavour for China to achieve its climate-change goals, where China is also said to be working with Europe to announce a green taxonomy sometime this year.

. Taiwan’s export orders surged 48.5% y/y in February 2021, surprising market estimates for a 45.4% y/y print. The orders have been in positive growth for twelve straight months, led by increased demand from its key trading partners such as Europe (+73.4% y/y), U.S. (+50.2% y/y) and Hong Kong (+48.6% y/y). Taiwan’s economics ministry expects export orders to grow between 43.7% and 45.1% y/y in 1Q21.

. South Korea President Moon Jae-in commented that the domestic economy is expected to rebound “faster and stronger” in 2021 on the back of strong exports and investments. He added that South Korea’s labour market is expected to improve in March, underpinned by an uptick in consumption. Note that South Korea’s finance ministry is pencilling a full-year GDP expansion of 3.2%, versus Bank of Korea’s outlook of 3.0%.

. Moody’s Analytics view that the Philippines may cut its benchmark rate in 2Q21 should COVID-19 cases continue to increase. The agency added that “the near-term prospects remain worrisome for the Philippines as it copes with an intensifying virus outbreak that shows no signs of abating.” Note that Bangko Sentral ng Pilipinas (BSP) maintained its overnight reverse repurchase (RRP) rate at 2.00% on 11 Feb, and we expect BSP to keep its benchmark rate unchanged in 2021.

. The latest monthly bulletin by the Reserve Bank of India (RBI) cited COVID-19 risks could dent India’s growth prospects in 2021. Specifically, the bulletin cited that “another outbreak, more lockdowns and restraints, will get unbearable” for the economy. We note that the tone is starkly different from RBI’s latest monetary policy statement, which was relatively positive - citing that “risks to the recovery may abate and economic activity is anticipated to gain momentum in the second half of 2021.”

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