Tuesday, August 18, 2015

Ringgit falls with bonds as inflation may spur policy response

AUG 19, 20152:09 PM

[KUALA LUMPUR] Malaysia's ringgit and long-term bonds fell as the fastest inflation in a year fueled speculation interest rates will be raised amid an economic slowdown.

The introduction of a 6 per cent goods and services tax in April is putting pressure on domestic prices, while import costs are rising after the ringgit slumped 15 per cent this year in Asia's worst performance. While boosting borrowing costs may be the "bitter pill Malaysia has to swallow to anchor important macro variables," such a move could spur further capital outflows, especially if it "compromises an already fragile economy," said Nizam Idris, Singapore-based head of foreign- exchange and fixed-income strategy at Macquarie Bank.

"Hiking rates isn't always positive to the currency, especially if it's seen as a move to curb inflation while growth remains weak," said Mr Nizam.

The ringgit dropped 0.5 per cent to 4.1097 per dollar as of 1:24 pm in Kuala Lumpur, after rising as much as 0.3 per cent earlier, prices from local banks compiled by Bloomberg show. It dropped to 4.1340 on Monday, the lowest level since 1998.

The 10-year government bond yield rose three basis points to 4.33 per cent, according to Bursa Malaysia prices. That's the highest for a benchmark of that maturity since 2010.

The economy expanded 4.9 per cent in the three months through June, the slowest pace since the third quarter of 2013. The central bank has kept its benchmark policy rate at 3.25 per cent for the past year, refraining from joining a global wave of easing to boost growth.

Consumer-price gains quickened for a fifth month in July, rising 3.3 per cent from a year earlier, the government reported Wednesday. That's the fastest pace since August 2014 and more than the median 2.9 per cent increase predicted in a Bloomberg survey. The central bank's annual inflation target is 2 per cent to 3 per cent.

The ringgit's drop to a 17-year low is already spurring outflows. Global investors cut holdings of sovereign and corporate bonds by 2.4 per cent last month to 206.8 billion ringgit (S$70.6 billion), the least since August 2012.

BLOOMBERG

Tianjin blasts echo across Chinese economy

AUG 19, 20151:17 PM

[TIANJIN] With a swathe of one of the world's busiest ports in ruins, more than a billion dollars in losses, and some major multinational firms still unable to access their premises, the economic impact of the Tianjin explosions could reverberate for months.

Last week's blasts triggered a giant fireball and killed 114 people, sparking fears over toxic pollutants in the city's air and water, though authorities have insisted both are safe.

They also devastated a large area of the port of Tianjin, a key gateway to the world's second-largest economy and its biggest trader in goods.

Among the most striking images of the disaster have been those showing countless lines of imported cars burned to a crisp, with about 10,000 new vehicles near the blast site reportedly destroyed.

More than 150 companies in the Fortune 500 - the US magazine's listing of the world's biggest firms - have operations in the city, and its port is one of the 10 busiest globally.

The city has a population of 15 million people, almost twice that of London, and an economy roughly the size of the Czech Republic.

"Economic activity in Tianjin has yet to return to normal several days after the devastating explosions there," Capital Economics, a research firm, said in a note to clients.

"While most of the port has remained in operation, damage to warehousing and factory facilities has been severe," it added, warning that "disruption is likely to spread along supply chains".

NO ACCESS

Some of the world's biggest companies have had their operations in the area affected, including Japan's Toyota, the number two global automaker.

Production at its plant in the area remained suspended Wednesday. More than 50 out of 12,000 employees at the factory, which produces models including the Corolla sedan, were injured.

"We are still assessing the situation," a Toyota spokesman said.

Pharmaceutical giant GlaxoSmithKline also has a plant in the area around the blast site, and a spokeswoman told AFP that it had been unable to access it to assess the damage.

US agricultural machinery manufacturer John Deere said its factory was damaged, Bloomberg News reported.

European aircraft manufacturer Airbus has a giant assembly plant in the Tianjin, its only such facility in Asia and crucial to one of its most important markets.

Its staff were safe, it said, but it has offered to move employees to downtown Tianjin, away from the port area, and was analysing "the logistics situation".

"We are trying to find solutions," a spokesman added.

Soft drinks giant Coca-Cola and Japanese automaker Honda both told AFP they were evaluating the impact of the blasts on their operations.

SHARES PLUNGE

According to the American Association of Port Authorities' 2013 world ports rankings, the most recent available on its website, Tianjin ranked third globally for cargo volume on 477 million tonnes, and 10th for container traffic, with nearly 13 million twenty foot equivalent units.

Tianjin Port itself says that operations have returned to normal "except for those at the site or surrounding areas" - which could cover a significant section of the facilities. It did not respond to requests for details from AFP.

Shares in Tianjin Port Development Holdings tumbled more than 13 per cent in Hong Kong on Monday - their biggest loss since 2009, and were down 2.9 percent to HK$1.36 on Wednesday.

Losses in the auto sector alone were estimated at US$310 million, according to the People's Daily, the official mouthpiece of China's ruling Communist Party, and the Fitch ratings agency has warned that insurance claims resulting from the explosions could amount to US$1.5 billion.

Analysts say the long-term effect will depend on how long port operations are disrupted, with investment bank Nomura saying in a note that while it did not expect a "significant" impact on the economy, "The key issue is whether this area will be affected permanently or temporarily." Northern China faces "an immediate interruption in chemical and plastic supply" for up to a month, research firm IHS said.

"The port is responsible for the area covering Beijing and the surrounding area, so it's very important," said Tse Leung Yip, an associate professor at the International Centre for Maritime Studies at Hong Kong's Polytechnic University.

"Ships could berth nearby, but it's not very convenient, especially because Beijing really relies on Tianjin's port."

AFP

Malaysia riskier than Mexico has UBS warning of worse to come

AUG 19, 201511:40 AM

[SINGAPORE] Malaysia is paying the price for weak foreign currency holdings and messy politics as the cost to protect its debt soars to near a four-year high. UBS Group AG predicts even more pain ahead.

The spread on the nation's credit-default swaps widened 74 basis points in 2015 to 180 this week, a level not seen since October 2011. It's the worst performing in Asia and almost 40 basis points more than similar-rated oil-producer Mexico, which the Swiss bank says best illustrates the malaise for Malaysia.

"The moves in CDS are telling us that the market is increasingly nervous about the central bank's ability to manage the foreign-exchange selloff in light of its relatively light reserves position," said Manik Narain, a London-based strategist at UBS. "Malaysia's situation may now be more precarious."

Bank Negara Malaysia's foreign-exchange reserves slipped below US$100 billion last month for the first time since 2010.

They look "increasingly meagre" by emerging-market standards, said Mr Narain, and compare with foreigners' RM206.8 billion (S$70.8 billion) holdings of local-currency debt in July, the lowest in three years.

The ringgit this week traded near the weakest level since 1998 as Prime Minister Najib Razak comes under the spotlight over reports of an almost US$700 million donation into his bank account that was initially linked to debt-ridden state investment fund 1Malaysia Development Bhd.

The central bank may have to raise interest rates because of a limited ability to defend the currency amid falling reserves, Mr Narain said.

The ringgit was trading at 4.09 per dollar at 10.18am in Kuala Lumpur and UBS expects the currency to fall to 4.20 by year-end.

BLOOMBERG

China: Yuan slips as mainland stocks slide

AUG 19, 201511:22 AM

[HONG KONG] China's yuan edged lower on Wednesday as stocks fell over 2 per cent in opening trades, though a broadly flat yuan fixing checked sharp losses for the currency.

Stocks plunged more than 6 per cent on Tuesday, their biggest fall in three weeks, on speculation the central bank may be in no rush to ease policy further and amid concerns a further weakening in the yuan would hit importers.

Traders in China's currency markets have been wary of sharp swings in daily fixing rates after the central bank's surprise devaluation of its currency by nearly 2 per cent on Aug 11.

"We are in for a period of greater market volatility than ever before but a sustained devaluation is unlikely because that would deter foreign investors from investing in China's equity markets," said Benjamin Pedley, head of investment strategy - Asia at HSBC Private Bank in Hong Kong.

The People's Bank of China set the midpoint rate at 6.3963 per dollar prior to Wednesday's market open, a shade weaker than Tuesday's closing quote of 6.3938.

The spot market opened at 6.3949 per dollar and was changing hands at 6.3984 in early deals, slightly weaker than Tuesday's close of 6.3938 per dollar.

While spot yuan is currently allowed to trade in a 2 per cent range around the daily fixing, last week's devaluation has caused onshore spot to trade on the weaker side of the fixing until state-owned banks stepped in to restore some calm.

In the derivative markets, implied currency volatility in offshore yuan has declined from record highs hit last week, though it remains at elevated levels as traders have begun to price in greater expected price swings in the yuan.

The basis spread between the offshore and onshore yuan has tightened after last week's blowout, a sign of reduced market stress.

Still, analysts expect the yuan to remain under pressure in the coming days especially with a likely rate increase from the US Federal Reserve looming on the horizon.

"Historically whenever the Fed has started raising rates, emerging market currencies haven't done well," HSBC's Pedley said.

Morgan Stanley expects the yuan to weaken to 6.91 by end-2016 while Goldman Sachs expect the yuan to slip to 6.7 over the same time period.

REUTERS

American Airlines to launch LA-Cuba charter flights

AUG 19, 20157:08 AM

[WASHINGTON] American Airlines said on Tuesday that it would begin weekly charter flights between Los Angeles and Havana in December, as the US and Cuba edge closer to full bilateral aviation relations.

American would become the second major US airline to take advantage of loosened restrictions on travel between the two countries, after JetBlue launched direct charter flights between New York and Havana last month.

American has operated charters from Florida to Cuba since 1991 principally serving the large expatriate Cuban community, but the new Los Angeles route recognizes the rapidly expanding market of non-Cuban travelers.

"American is the premier carrier in Los Angeles and throughout the Caribbean, and this new charter flight shows how we continue to expand our reach by offering new routes and services our customers want," said senior vice president Art Torno in a statement.

As with JetBlue, restrictions will apply to American Airlines's Cuba service: Tickets have to be sold through a separate, specially authorized travel company rather than directly by the carrier; and regularly scheduled service is still prohibited.

American's tickets will be sold through Cuba Travel Services, which has long handled tickets for the carrier's charter flights from Florida.

A five-decade Cold War freeze of relations between the two countries, separated by a bare 150km of Caribbean waters, began thawing after US President Barack Obama's agreement with Cuban President Raul Castro to restore diplomatic relations last year.

Cuba reopened its embassy in Washington on July 20, and the US embassy reopened in Havana last week.

While travel by Americans to Cuba is still restricted, airlines and cruise ship operators are jockeying for position in what could become a lucrative tourism trade as Cuba opens its economy.

On Tuesday The Wall Street Journal reported that the White House is pushing for an agreement with Havana by the end of the year on establishing regularly scheduled commercial flight services.

The State Department however cautioned Tuesday that fully normalizing relations will be "a long, complex process." "We remain in contact with the Cuban government regarding the establishment of scheduled air service," spokesman John Kirby said, adding that "no decisions have yet been made." American Airlines's Torno said it was looking forward to that possibility.

"We stand ready to offer scheduled service as soon as the United States and Cuba allow commercial flights," he said.

United Airlines also said earlier this year it wants to begin Houston-Havana and Newark-Havana flights.

AFP

Asian: Shares mixed after China slump

AUG 19, 201510:26 AM

[HONG KONG] Asian shares were mixed on Wednesday, with Shanghai continuing a sharp sell-off on concerns the world's number two economy is slowing and as investors awaited clues for the timing of a US interest rate rise.

Sydney rose 1.33 per cent in early trading while Seoul dropped 1.10 per cent.

Tokyo fell 0.45 per cent after news Japan's trade deficit fell a less-than-expected 72.3 per cent year-on-year in July due to falling energy costs and a pick-up in exports.

Hong Kong rose 0.25 per cent but Shanghai dropped 1.87 per cent, continuing its downward trajectory the day after China's benchmark share index suffered its steepest fall in three weeks.

"Market sentiment is likely to be influenced by what happens on the Chinese exchanges today," Ric Spooner, chief market analyst at CMC Markets in Sydney, told Bloomberg News.

"Investors remain particularly sensitive to developments in China after last week's currency devaluation and are looking for comfort that things are not worse than they seem."

Tuesday's more than six per cent slump in Shanghai dragged down European shares and hit commodities, rattling markets already jittery after Beijing's surprise devaluation.

Falling demand in the world's top consumer of industrial metals and energy - and the prospect of an impending US interest rate hike - pushed Bloomberg's commodity index to its lowest level since 2002.

Oil prices fell further in Asia ahead of the release of minutes from the most recent meeting of the US Federal Reserve.

US benchmark West Texas Intermediate for September lost 22 cents to US$42.40 and Brent crude for October lost 28 cents to US$48.53 a barrel in morning trade.

Concerns about China also weighed on Tokyo shares after data showed Japan's deficit shrank to 268.05 billion yen (S$3 billion) last month against 966.5 billion yen a year earlier.

Economists had predicted the shortfall would shrink to around 53 billion yen, but a rise in automobile exports and a fall in energy imports cut the trade disparity even further.

The lacklustre data came two days after news the world's third-biggest economy contracted last quarter, boosting speculation the central bank will unleash more stimulus as Tokyo's Abenomics growth blitz stumbles.

"Another big drop in Chinese equities is leading to concern over the Chinese economy and a lack of transparency in the global economy," Hiroichi Nishi, a manager at SMBC Nikko Securities, told Bloomberg News.

"We're lacking reasons to aggressively buy in Japan." The dollar traded sideways in Asia ahead of the release of the Fed minutes, due later on Wednesday, for clues on when it will next hike interest rates.

Some dealers expect that the first rise in US interest rates in almost a decade could come as early as next month after a raft of signs the world's top economy is strengthening.

The greenback fetched 124.38 yen, unchanged from New York trade late Tuesday.

The euro was slightly up at US$1.1031 and 137.20 yen against US$1.1029 and 137.19 yen.

Gold was at US$1,117.65 compared to US$1,119.83 late Tuesday.

AFP

Tuesday, August 18, 2015