Starting 2021 with downside risks

Starting 2021 with downside risks


UnionBank Publication

UnionBank Publication

184 week ago — 10 min read

BVAL rates forecast ranges: 5yr: 2.441% - 2.641%    10yr: 2.877% - 3.077%
Pay short duration/Buy the curve’s belly/Cut long duration

Week ahead (Jan 11-15):
Gov. Diokno’s recent hawkish statement will haunt the market in the near-term. We concur with our traders’ expectations that local bond yields may trade sideways with an upward bias. Coupled with the 10yr US treasury rate staying intact in the 1% range amid the preceding week’s disturbing US political events prior to the formal installation of US President-elect Biden and VP-elect Harris on the 20th, the steepening local curve outlook is in play (but not a shift up of the entire curve). We acknowledge Diokno’s recent comments will influence profit taking sessions. But we maintain our view that 4Q20 GDP data (Jan 28th release) will have a larger influence on the BSP’s first policy rate meeting on Feb 11. A 4Q GDP decline in the -6%YoY to -9%YoY may prompt a Monetary Board decision to reinvigorate accommodation early in 2021 with a 25bp rate cut and more aggressive BSP bond purchases. Aside from anchoring the front end of the curve, this development would also enhance BSP’s quasi-management of the yield curve. This will sustain Treasury’s access to cheap bond financing in support of another budget deficit in the 8-9% range of 2021 GDP. As the yield curve outlook steepens, we await the 7-10yr yield drifting beyond 3% that could spark strong market interest with or without additional BSP easing

Previous week’s recap (Jan 4-8):
Against a higher-than-expected Dec inflation backdrop, BSP Gov. Diokno’s hawkish comment prompted a sell-off in the government bond market with yields up by 8bp from the short-end to the belly of the curve in Thursday’s session. He claimed the rate easing cycle will pause in 1H21 despite stating in previous occasions there’s room for monetary flexibility. Alongside the US treasury curve’s more overnight, the market turned cautious and took profits particularly in and around the 5yr segment. The 10yr US treasury breached  upside of 1% as markets anticipated stronger US fiscal stimulus and by extension, larger US budget deficits following the Georgia’s Senate runoffs won by Democrat candidates (essentially a Democrat-controlled Congress). RTB5-13 was last done at 2.62% vs 2.54% previously while the FXTN 10-60 edged higher to 2.625&%. Total trading volume soared to Php33.3bn in Thursday’s session.

USDPHP forecast range: 47.85 – 48.15
Tactical sell USD/Long-term underweight PHP

Week ahead:
We expect enduring broad-based USD weakness on expectations of stronger US fiscal stimulus/larger budget deficits, loose Fed monetary policy and negative real interest rate condition although this bodes well for global risk-on sentiment. Confirmation of President-elect Biden and VP-elect Harris by the US Congress was a big relief. A break of the critical 48 psychological level may lead USDPHP to test support of 47.98 followed by the 47.80 and 47.30 after. However, as the 48 barrier is tested, we may see familiar suspected bids of intervening banks. Expected range will be within 47.85 – 48.15.

Previous week’s recap: USDPHP failed to breach downside of 48 as we closed 2020 with the pair caught in the tight trading range of 48.04-07. The pair’s tight range persisted during the week despite DXY index at 89.2 in Thursday’s session, the lowest since March 2018, consistent with USD weakness during the end-year holiday break. Trading volume was muted with suspected agent banks bids seen at 48. USDPHP sided with EM Asia currencies that were little changed amid chaotic scenes at US Capitol Hill on the eve of the certification process of the Biden-Harris election victory.

PSEi forecast range: 7,000 – 7,200
Accumulate the index

Week ahead:
Our traders expect the PSEi will trade within a tight range of 7,000 – 7,200 contingent on local investor sentiment. While global markets felt relief after the US Congress certified Biden-Harris election victory, the narratives may switch back to the COVID-19’s downside risks and the deep US political chasm likely to pose strong policy challenges moving forward. With risk-on sentiment spoiled by the recent Trump-inspired, mob violence in US Capitol Hill, the PSEi may miss strong foreign buying support. With our end-2021 PSEi forecast of 7,500 – 7,800 (PER: 21.9x) underpinned by recovery prospects, the core strategy remains a buy on dips.

Previous week’s recap: News of a PH resident having tested positive with the new COVID-19 strain as she entered Hong Kong spoiled local market sentiment during the first week of the new year. Early in the week, higher-than-expected Dec inflation was the initial disappointment. By mid-week, the PSEi shed 89pts intra-day to just above 7,000 on the back of the broader fear of the new COVID-19 strain already onshore that may compel another severe lockdown. Local health officials downplayed this risk. Global risk-on sparked by a Democrat-controlled Congress following the Georgia state’s ‘blue-wave’ Senate runoffs, suported bargain hunting in Thursday’s session as PSEi gianed 71 pts intra-day to above 7,100 


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