Ahead Today
G3: US Construction Spending, US Mortgage Applications
Asia: Bank Indonesia
Market Highlights
The JGB bond market sell-off was one for the ages, with the 30-year yield in particular rising by more than 25bps intra-day. Market concerns around Japan’s fiscal trajectory given potential policy changes including a proposed consumption tax cut on food with the upcoming snap Lower House election, and was likely exacerbated by thin market liquidity. This resulted in risk aversion more generally, and possibly also reflecting concerns around unwind of global carry trades. From an FX perspective, the Japanese Yen’s performance was more mixed, with these moves also combined with general risk aversion, and a weaker US Dollar driven by a mini-sell US assets trade happening at the same time with the Greenland issue happening in the background.
The spillovers from these moves were more evident in the developed market rates, with 10-year US Treasury yields rising to 4.3% from 4.2%. In our region interestingly in South Korea this gave further momentum to an upward move in 10-year KTB bond yields which had already been happening for some time, which the front-end rates market increasing some pricing for rate hikes by the Bank of Korea. Analysis by the IMF shows that a 100-bbps increase in JGB yields typically leads to a 5-10bps increase in US and Euro-area yields, but this assumes a mild impact on global risk aversion, and probably has not taken into account structural changes in Japan’s economy and policy direction as well.
Overall, our global team thinks that these dislocations in JGBs may still continue until the market gets better clarity on Japan’s fiscal trajectory, while from an FX perspective JPY is likely to suffer bouts of underperformance in the near-term even if we get further sharp deterioration in global risk sentiment (see FX daily - USD suffers mild sell-off as JGBs tank).
In our region, we have been holding on to a preference for the higher beta Asian FX such as KRW, TWD, together with the likes of CNY and MYR more for domestic reasons, while expecting some weakness and underperformance in the likes of INR, IDR, VND and PHP. So far, USD/KRW has moved against our expectation in part driven by continued strong resident outflows coupled with the spillovers from Japan including the moves in JGBs and JPY more generally, as mentioned above. Nonetheless on our end, we would probably be biased to fade this move and perhaps going short JPY/KRW could be a good way to expressing this view, and also putting aside the Dollar trend. South Korea’s 20-day export numbers have been quite good for January, up by 15%yoy, from 7%yoy previously. Meanwhile, lead indicators of Asia’s exports such as industrial metal prices have moderated slightly but remain at elevated levels, and coupled with rising memory chip prices should imply a better outlook for South Korea’s export prices moving forward. Meanwhile, we also see the sharp rise in South Korea’s rates market as probably being too fast and too sharp, with BOK unlikely to consider rate hikes at this point in time despite concerns around the housing market and volatile KRW.
