THE safe-haven US dollar posted a modest gain of 0.14% to 90.82, taking a breather from a sell-off that took it to a more than 2½-year low last week. The focus of the week was on the negotiation among US lawmakers to append a new coronavirus stimulus aid to a funding bill to avert a government shutdown on Dec 11. The progress on the fiscal aid talks subsequently stalled towards the end of the week – encouraging investors to lighten their risk exposure. However, lawmakers managed to pass a temporary bill allowing the federal government to remain open for one more week to work on a bipartisan deal on government spending. On vaccine progress, US regulators gave early indications they may grant emergency-use authorisation to the Pfizer vaccine. Nevertheless, economic data release during the week were rather mixed with: (1) November inflation rising 0.2% month-on-month (m-o-m) from 0.0% m-o-m in October; and (2) initial jobless claims jumping to 835,000 as of Dec 5 from 716,000 in the week prior (consensus: 725,000). Crude oil further posted gains with Brent gaining 2.03% week-on-week (w-o-w) to US$50.25 per barrel – surpassing the US$50 mark for the first time since early March this year. The gains were contributed by: (1) hopes of a faster demand recovery after the release of Covid-19 vaccines; and (2) expectations of a US economic stimulus package. Nevertheless, the Energy Information Administration reported a massive crude oil inventory build of 15.2 million barrels for the week to Dec 4, following a modest draw of 700,000 barrels in the week prior. The euro garnered the bulk of interest during the week in review as investors took to the sidelines ahead of the European Central Bank (ECB) monetary policy meeting. As expected, the ECB held interest rates steady at -0.50% and announced further asset purchases – which fell in line with market expectations. The ECB said it would expand its 1.35-trillion-euro emergency bond-buying programme by another 500 billion euros and extend it to March 2022. At the same time, the ECB did not indicate strong verbal intervention on the euro strength. This paved way for the euro to offset its early week losses and strengthening 0.14% w-o-w to 1.21. The pound underperformed among its peers, depreciating by 1.09% to 1.33 – a near two-week low after the latest round of high-level trade talks between the UK and the EU failed to provide a breakthrough with the UK government saying that “very large gaps remain between the two sides”. The two sides set a final Sunday deadline for a “firm decision” on any potential deal. The yen lacked direction under the week in review, weakening marginally by 0.07% to 104.2. Nevertheless, Prime Minister Suga announced US$708bil in fresh stimulus to speed up the country’s recovery from its deep coronavirus slump. The package will include about 40 trillion yen in direct fiscal spending and initiatives targeted at reducing carbon emissions and boosting digital technologies. Asia ex-Japan currencies’ performance was rather mixed. Still, the baht was the outperformer, appreciating 0.37% to 30.08 albeit the gains were limited due to central bank intervention. Meanwhile, the South Korean won was the underperformer during the week, down 0.52% to 1,087 due to a spike in domestic Covid-19 cases. On Wednesday, 686 new cases were reported, the highest daily count since Feb 29. Meanwhile, the ringgit closed stronger by the end of the week, up 0.06% to 4.06 due to stronger crude oil prices, offsetting the early week concerns over Fitch’s downgrade. US Treasuries (UST) Market The US Treasury yield bull flattened with the front end easing by 1-3 basis points (bps) while the back end fell 6-10bps. The closely watched 10-year yield eased 6bps w-o-w to 0.906%. Risk-off sentiment emerged as hopes of a Brexit trade deal faded amidst a last-ditch attempt to find a solution as well as the stalemate in US fiscal aid talks. As at noon yesterday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 0.13%, 0.38%, 0.91% and 1.63%, respectively. Malaysian Bond Market The Malaysian Government Securities (MGS) market witnessed a knee-jerk reaction on Monday as investors reacted on Fitch Ratings’ decision to downgrade our long-term foreign-currency issuer default rating (IDR) to BBB+ with a “stable” outlook. Selling pressure, however, tapered after the reopening of the 10Y Government Investment Issue (GII) ‘10/30, which garnered a solid bid-to-cover (BTC) of 2.619 times. Also we saw selective buying mid-week, particularly at the back end of the curve – taking cues from global bond yields movement. By end of the week, the front end of the MGS curve rose 2.5bps while the back-end eased 3.5-4.5bps. Nevertheless, the 10Y GII auction was the final auction in 2020 with an issue size of RM4bil, including RM500mil of private placement. It closed with a high/low of 3.008% and 2.950% while averaging at 2.986%. For the full-year 2020, the gross MGS and GII issuances amounted to RM148.8bil (2019: RM115.7bil). Moving into 2021, we estimate the gross government issuance at RM160bil. As at noon yesterday, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 1.92%, 2.15%, 2.51%, 2.74%, 3.25%, 3.47% and 3.97%, respectively. Activities in the govvies segment declined 29% w-o-w to RM9.8bil from last week’s RM13.9bil. The MGS segment shrank 53% to RM4.9bil from RM10.4bil in the previous week. The GII increased 35% to RM4bil from RM3bil. Meanwhile, the short-term bill’s (MTB/MITB) trading was higher by 86% w-o-w to RM900mil from RM500mil. Secondary trade volume contracted during the week, down slightly by 4% to RM1.1bil. The credit spread narrowed by 13.6bps on average across the curve. The shorter end rose 22.1bps on average while both the belly and longer ends of the curve eased averagely by 46bps and 13bps, respectively. Ringgit Interest Rate Swap (IRS) Market The IRS was seen easing 0.5-1.3bps from the front until the belly side of the curve. Meanwhile, the back of the curve rose 0.5-1bps. The 3-month Klibor stood at 1.94%. Elsewhere, the 5-year CDS increased by 9.5% w-o-w to 38.8bps. Malaysian Equity Market During the week (Nov 5–Dec 10), the FBM KLCI surged 26.13 points (pts) or 1.60% to 1,654.39 pts, in line with the uptrend in MSCI Emerging Markets (EM) Index (+1.26%) but outperforming the Dow Jones Industrial Average (+0.10%). Globally, the rollout of Covid-19 vaccines, optimism on a US relief deal before the end of the year and the continued recovery in crude oil prices were offset by the still elevated initial jobless claims in the US and the record Covid-19 infections in various parts of the world (and hence the potential return of lockdowns). These had not diminished the attractiveness of EM equities as a long-term recovery play. Foreign investors sold RM674.4mil worth of Malaysian equities, bringing the year-to-date net outflow to RM24.6bil. Local institutional and retail investors continued to dominate the market with a participation rate of 45% and 41.2% in December respectively (compared to 45.2% and 38.4% in November). As foreign investors stayed passive, their participation rate remained low at 13.9% in December (compared with 16.4% in November). Meanwhile, foreign investors piled into MGS for a seventh straight month with a net inflow of RM1.8bil in November 2020 (versus RM3.9bil in October). Year-to-date, foreign investors have been net buyers of MGS with a total net inflow of RM11.1bil. Equity trading activities improved with the average daily value traded rising to RM6.1bil in December (versus RM5.2bil in November), while turnover velocity increased to 83.6% in December (versus 74% in November). During the week, nine out of 13 sectors in Bursa Malaysia ended in the positive territory. The best performing sector was energy (+7.6%), driven by higher crude oil price on optimism on global economic recovery. The worst performing sector was healthcare (-2.3%) as investors continued to lighten their positions in glove stocks. In the coming week, investors will keep a close eye on: > Eurozone industrial production (October) on Dec 14; > China industrial production (November) on Dec 14; > US retail sales (November) on Dec 16; > US interest rate decision on Dec 16; > Eurozone consumer price index (November) on Dec 17. 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