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Growth of foreign inflow continues in Asia markets

Growth of foreign inflow continues in Asia markets

Growth of foreign inflow continues in Asia markets though major equity markets across the globe ended the week in a sea of red. The ongoing tension between Russia and Ukraine is weighing on sentiments, say experts.

Markets in Asia, particularly Southeast Asia, saw improvements, suggesting rotational flows into the region.

Malaysia’s barometer index, the FBM KLCI, advanced 0.77% over the past week, coming in behind Philippine’s PCOMP and Korea’s KOSPI, while being ahead of other major indices.

In the U.S., equity markets were dragged into the red by technology, financials, communication and consumer discretionary sectors.

The energy sector advanced, alongside the rise in crude oil prices to multi-year highs but talks of a nuclear deal between the economic powerhouse and Iran which could add more supply in the market eased the soaring prices.

Unemployment in the Eurozone dipped to a record low of 6.8% in Jan-22 (Dec-21: 7%), marking a rate of below 7% for the first time as the labour market continued to recover. However, its factory-gate inflation rose to an all-time high of +30.1%yoy (Dec-21: +26.3%yoy), surpassing market expectations.

Brent crude oil price saw a +20.61%weekly movement last week, to close at USD118.11/b last Friday

The FBM KLCI increased by 0.77% for the week to settle at 1,603.94 points. As for the Ringgit, it saw a weekly appreciation by circa 0.58% against the US dollar to close at USD/MYR 4.1778 last Friday.

Foreign inflow

The benchmark 10-year UST yield fell -23.1 basis points to 1.73 percent at the end of the review week. The UST market saw a resurgence of purchasing activity throughout the curve, as investors flocked to safe-haven assets as the Russia-Ukraine conflict escalated.

As the short end underperformed, the 10y-3y yield differential tightened (yield curve flattened) from 20bps to 12bps week on week. Empirical evidence suggests that a quickly flattening curve indicates a higher likelihood of real production growth slowing, says MIDF.

As a result, in light of the probable economic impact from the Russia-Ukraine war, the US Fed must take care not to understeer or oversteer its policy measures in response to the existing inflationary pressure. The 5-year breakeven inflation rate (UST-TIPS) closed the review week higher at 3.26 percent (previous week: 3.11 percent), the highest level since records started in January 2002.

The intensification of Russia-Ukraine war pushed key commodity prices higher hence exacerbating the prevailing inflationary pressure. It must again be highlighted that inflation expectation remains elevated beyond the (hotter-than-normal) inflation range of 2.25%-2.50% acceptable (transiently) to the US Fed despite (i) the end of QE in February, (ii) rate liftoff likely in March, and (iii) the prospect of QT (balance sheet reduction) soon after.

“At current juncture, it seems the market is still not fully convinced that the US Fed has moved ahead of the curve in regard to its battle against inflation. The price of domestic MGS benchmark issues ended the review week mixed with the 3-year and 10-year yields added 4.8bps and shed -2.1bps to close at 2.73% and 3.65% respectively.

“The 10y-3y yield spread narrowed (yield curve flattened) week-on-week from 98bps to 92bps as the short-end underperformed. Unlike the UST, the MGS market does not exhibit rapidly flattening curve. At this juncture, our economist expects Malaysia’s output growth remains on course to rebound to 6.0% in 2022. MGS foreign holdings increased on-year from RM227b in January 2021 and on-month from RM257b in December 2021 to RM260b in January 2022,” says the research firm.

Recent stats

More importantly, the most recent statistic is the highest on record. The 12-month rolling total of foreign net equity transaction on Bursa Malaysia concluded the review week at RM1.92 billion, the highest level since mid-May 2018.

It increased week on week from RM898m the previous week. Furthermore, it increased significantly year on year from -RM22.01b the previous year.