Vaccine lift, cut by Ulysses

Vaccine lift, cut by Ulysses


UnionBank Publication

UnionBank Publication

191 week ago — 9 min read

Market Focus

BVAL rates forecast ranges: 5yr 2.730% - 2.820%; 10 yr: 3.10% - 3.18%
Tactical buy on short-duration/Neutral on the curve’s belly/Receive long end on dips

Week ahead (Nov 16 - Nov 20): We expect Monetary Board to keep its powder dry in its scheduled meeting on the 19th although an RRR cut may be a possibility (Bloomberg). 3Q GDP’s silver lining (+8%QoQ SA), subdued credit demand amid hefty broad liquidity gains, and food CPI’s reaction to the ‘storm surge’ although a one-off, may anchor BSP’s policy rate decision. Alongside the budget deficit in October headed for a record high quarterly fiscal gap (UBP 4Q20 budget deficit: Pph 643bn) and this month’s 5 yr government debt sales, the cutback in duration will persist. A steeper US treasury curve reinforces this likelihood. We look for curve steepeners beginning with more upside pressures in the liquid belly.

Previous week’s recap (Nov 09 – Nov 13):
Short-duration bias was evident in trading amid light volume before the 3Q GDP release. Disappointing 3Q GDP did not diminish this preference for short tenors as the 5yr and 10yr BVAL rates closed Wednesday’s session up by 3bp intra-day. Bias for trimming duration won’t be distracted by typhoon effects that may trigger food price.

USDPHP forecast range: 48.10 – 48.50
Tactical sell USD/Long-term underweight PHP
Week ahead:
Excitement over the vaccine news was cut short by upsurge in case infections in the US/Europe and some global Central Bank officials warning of risks of delays in the vaccine rollout, logistics, production and access. Lacking 4Q fiscal stimulus although there’s talk of another round of renegotiations in the lameduck US Congress as COVID-19 stateside cases soar, may handicap USD this week. If recent trading sessions offers any indication, commercial flows from remittance providers, BPO conversions for payroll and others, heavily favored PHP. On balance, USDPHP will perisist in probing the psychological barrier of 48 for the rest of the year. For this week, the range of 48.10-50 may hold with the currency pair testing the low barrier subject to BSP intervention. Data releases and BSP’s scheduled policy meeting this week will be neutral to USDPHP.

Previous week’s recap: A global risk-on backdrop following the upbeat Pfizer’s vaccine report early in the week didn’t last. Markets turned sober with connections on higher case infections in the US/Europe and subsequent government moves to clampdown on mobility and social gathering. USDPHP was focused on alternating global risk sentiment that disappointing 3Q GDP barely made a difference. The local pair closed at 48.27 as of Wednesday before typhoon Ulysses hit.

PSEi forecast range: 6,700 – 6,900
Buy index stocks on dips

Week ahead: The anticipated global event of large scale vaccine production and distribution will be months down the road. Surging case infections in the US/Europe and subsequent government restrictions/lockdown response sans US fiscal stimulus, will dominate near-term market sentiment. Lacking major local data releases, BSP’s policy meeting on the 19th will be awaited. Food price upticks due to ASF and the sequence of typhoons, excess liquidity risk and ‘half-full’ version of 3Q GDP (+8%QoQ  SA) support unchanged policy rates in our view. Against this backdrop, market preference to harvest recent PSEi profits will persist. Our trader’s year-end target remains at 6,500 – 6,700 as the latest rally was for the most part sentiment and liquidity driven. Buy index stocks on dips.

Previous week’s recap:
Larger-than-expected 3Q GDP decline failed to derail PSEi’s ascent to a tick above 7,000 on Tuesday. Positive news on Pfizer’s vaccine trials (90% effective in preventing COVID-19) was a global catalyst. PSEi’s slight correction ensued in the next trading session but still above 7,000. We end the week with profit-taking after the typhoon beating on NCR, CALABARZON and other Luzon provinces, coupled with higher US/Eurozone case infections causing the pullback of global risk-on.

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