Macro Strategy: Market pricing on trade talks still tentative; BNM eases policy rate
Markets took another day to digest the implications of Trump’s threat to raise tariffs on Chinese imports (by this Friday) and decided to turn risk off. Overnight, the S&P 500 fell by 1.7%, and 10Y yields fell to 2.45%. When we look at the context of this selloff, we see broader factors beyond trade tensions. Granted, the market was priced for a favourable outcome as positive news narrative over the past few months provided a tailwind to assets. However, as the VIX pushed lower, assets become vulnerable to any negative surprises. Just last week, talks about a melt-up in equity markets had returned as the market focused on a potential bottoming in the global economy.
The manufacturing cycle may be more important than trade war in explaining slow global growth. To be sure, the ramifications of higher tariffs can be significant over the longer term, but in the short term the key impact of no-deal would largely be on sentiment, and therefore reflected in the markets (equity and bonds). There are parallels to be drawn in the lead-up to the equity market sell-off late last year, but the differences matter. Back then, a combination of slowing global growth, the prospects of several more rate hikes, and trade tensions shattered confidence. Now, the Fed is on pause and there are early signs that the Chinese economy may have stabilised. As such, a sell-down in risky assets of the same magnitude as 4Q18 does not seem probable.
In Asia, a kneejerk negative reaction to no-deal is unavoidable. Pressure on Asia currencies have emerged and yields across several economies have already risen as risk appetite wanes. Weaker risk appetite could cause Asia central banks to be more reticent in cutting rates. However, we should once again differentiate between sentiment and the real economy. While China-US trade talks are taking centre stage at this point, over the medium term, it is probably more important to see how China and the Eurozone economies are faring.
Malaysia: BNM cuts policy rate by 25bps
In line with expectations, Bank Negara Malaysia lowered the Overnight Policy Rate (OPR) by 25bps to 3.00% at its policy review yesterday. The central bank highlighted that “there are downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors”. Indeed, GDP growth in 1Q19 is likely to disappoint. Expectation is that the economy could register a paltry growth of 4.2% YoY in the first quarter. This will be the slowest since 2Q16 and below the central bank’s official full year GDP growth forecast of 4.3-4.8%.
Separately, inflation though likely to rise, will continue to remain manageable. Latest inflation figure (Mar19) has picked up to 0.2% YoY, from -0.7% in January, but still considered subdued by historical standards. We expect inflation to bottom in 1H19 and to start rising from 2Q19 onwards. Even with the increase, overall full year inflation is expected to register only 1.7%, still lower than the average inflation of 2.1% over the past decade. Barring any further negative shock, we expect the central bank to keep monetary policy stable, and to maintain the OPR at 3.00% for the rest of the year.
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