MktsFocUs: Bond steepeners likely with PSEI’s upswing?

MktsFocUs: Bond steepeners likely with PSEI’s upswing?

Economy

UnionBank Publication

UnionBank Publication

26 Oct 2020, 13:00 — 9 min read

BVAL rates forecast ranges: 5yr:  2.691% - 2.865%  10yr 2.884% - 2.982%
pay short duration/Buy the 5yrs tenor at 3% if not more/Accumulate long end at 3.25% if not more

Week ahead (Oct 26-30): From last week’s auction results amid strong demand and liquidity, we sensed looming upside for duration yields starting with the belly of the curve. With muted threat of upside inflation risk, onshore liquidity may be taking its cue from offshore markets wherein liquidity has started its migration from a defensive portfolio headlined by US treasuries and into a cyclical risk-based portfolio. As markets price in a Democrat party sweep in the US elections, it insinuates a condition of strong fiscal stimulus/spending likely to boost next year’s US prospects. A 3Q US GDP print likely to offset 2Q losses (see Week Ahead) bolsters the case for firmer 2021 US prospects and sustained Treasury sell-off. By coincidence, the PSEi with its own set of catalysts tracked upbeat US equity markets. What’s missing onshore to complete the picture is a steeper local yield curve. Risk-reward ratio will not favor duration exposure if potential PSEi returns by end-year will exceed flat local bond yields.

Previous week’s recap (Oct 19-23): In Tuesday’s auction, BTr awarded in full its auction of the reissued FXTN 10-60 (4.9yr) that elicited a bid-cover ratio of 2.3x and fetched an average yield of 2.78% (High: 2.84%/Low: 2.68%). Treasury kept a lid on its tap facility following the auction. Despite this, local yields moved sideways although tilted to the upside spurred by some profit-taking and the 10yr US treasury yield edging higher past 0.8%


Market Focus


USDPHP forecast range: 48.40 – 48.70
Tactical sell USD/Long-term underweight PHP

Week ahead: Hard to ignore end-month corporate FX demand for imports that support re-stocking among industrial firms led by manufacturers while bracing for broader USD weakness as we near the US election. Easing foreign portfolio equity outflows in PHP positive. Investor sentiment improved as quarantine restrictions in the NCR eased further that facilitated business re-opening of tourism-service providers (e.g., hotels), lower curfew hours and less stringent foreign travel requirements. As we head for end-month week, USDPHP may trade in the 48.40-70 range but partial to the low end. Initial resistance expected at 48.69. Strong resistance at 49. Technical support seen at 48.50 and 48.28.


Previous week’s recap:
USDPHP  went through subdued trading and kept to within the tight range of 48.52-65. US election developments and US fiscal stimulus negotiations prior to the elections kept market participants distracted. Also awaited is broader week USD across the board on the back of a “blue wave” victory in the US elections.

 

PSEi forecast range: 6,000 – 6,400
Buy index on dips

Week ahead: 3Q earnings disclosures may compel scrutiny of sequential gains or losses relative to hefty 2Q declines that bore that brunt of the harsh lockdown in response to the COVID-19 outbreak late Mar-Apr. Sequential earnings improvement and low PER relative to next year’s earnings, will continue to drive PSEi’s upside.  Market is seen consolidating above the 6,000 after last week’s breakout. This may give an opportunity for investors to re-enter the market and take positions in sync with 2021 economic recovery.


Previous week’s recap:
PSEi outperformed regional ppers as the index breached upside of 6,000 early in the week. Buying momentum was sustained as net foreign selling dissipated for a 6.84% WoW gain in Thursday’s session. Market sentiment turned upbeat on news of government’s decision to further relax quarantine restrictions and open up the economy coincident with stabilizing caseload infections. Mining stocks were given a boost by the government’s announcement of resumption of oil exploration with China’s support, in the contested West Philippine Sea. 3Q corporate earnings releases started with BPI and URC that failed to dampen market’s mood.

Article by: Ruben Carlo Asuncion
Contribution from Bank Treasury, Trust & Investments and Corporate Planning Groups

 
Image Source: Freepik

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