Daily Market Watch 23-3-2011 (Source: Vernon Lim Lee Cherh (HLB))

Macroeconomics

· Power has been restored at Japan’s nuclear power plant, easing concerns of meltdown while tensions in Libya eased as Allied force s secured no-fly zone. While concerns over a nuclear meltdown lifted, concerns over Japan’s economy lie unabated as Sony, Toyota and Honda announced further production halts, citing lack of supplies.

· Last week’s natural disaster in Japan sparked opinions that ECB may wait on further economic impacts before deciding on a rate hike. That opinion seems to have been put to rest when ECB officials commented that “strong vigilance is necessary to keep a lid on inflation”, reiterating ECB President’s remarks that the benchmark rate may be raised come April, as inflationary concern looks to be more distracting than economic impact the Japanese quake may have. CPI for the Eurozone has been advancing since Jun 2010.

· Inflation in UK beat forecast and gathered pace, rising 0.7% in Feb from 0.1% previously. Consumer prices grew 4.4% YOY, exceeding BOE’s target of 2% to pile pressure on policy makers to increase benchmark rate, which is at a record low of 0.5%.

· Malaysia’s foreign reserves rose to $110.40b as on Mar 15, up $ 0.62b from previous while Hong Kong’s inflation picked up to 3.7% in Feb from previous 3.6%, underlining price pressure not only in Hong Kong but globally.



Forex

· USD stayed soft as situation in Japan stabilises. With the US data falling short of expectations, the USD will likely remain soft in the near term.

· EUR declined against the greenback with more debt concerns surrounding Ireland and Portugal. We maintained our bearish view on the EUR in medium term.

· GBP soared on stronger-than-expected inflation data out of UK; increasing speculations that BOE will hike rates in 2Q. We maintained a bullish view on GBP in medium term, with expectations UK data to increasingly support the idea that the BOE will begin its rate hike cycle soon.

· JPY downtrend stabilized as Japanese nuclear concerns eased. Expect the JPY’s movement to be driven by news from the Fukushima plant this week. However, lingering fears on Japanese crisis as well as the MENA tension are likely to keep the JPY supported.

· AUD continued its climb against the greenback as risk appetites improved with easing concern in the Japanese nuclear crisis. Expect AUD to stay supported.

· MYR strengthened further against the greenback due to an improved risk sentiment with markets rebounding on reports the status of damaged nuclear facilities in Japan seems to be under control, for the time being. Ringgit is likely to remain steady in medium term, riding on local positive fundamentals.



Fixed Income

· UST ended mixed with losses on front end and mild gains on the 10-yr benchmark. Caution prevails on turmoil in Libya and risk from the damaged cooling system at nuclear plant in Japan. Dallas Fed President Richard Fisher said that no additional monetary stimulus will be needed after debt purchases under QE2 completes in June, which followed an earlier round of $1.7 trillion of purchases that ended a year ago, raising expectation that yields on government bonds are likely to go up.

· MGS closed mixed on the back of better stock performance. The belly of the curve pared losses with yields slipping 5bp to 3.57%, while the front end and long end fell with yields gaining 1-2bp to 3.39% and 4.04% respectively. BNM annual report will be released today, and inflation number for February later this week. Worries of rising inflation may cap gains on govvies.

Source: Vernon Lim Lee Cherh (HLB)