The US Fed had its first rate hike in almost a decade in Dec 2015, which appears to be tightening very late into the economic cycle and amidst declining corporate earnings in the US. With strong Dollar and subdued inflation currently permeating the economy, it seems that now is the year of policy divergence, i.e the US is tightening while the rest of the world easing.
In contrast, ECB continues to enhance its QE program and Japan struggles to grow out of deflation. The regions currently are operating in a negative interest rate environment.
Commodity slump affecting emerging market economies, along with capital outflow, tightening liquidity and weak currencies. These factors ascertaining a challenging 2016 for Asian emerging market economies, particularly the countries that have built the economies to serve China commodities demand.
Asia GDP growth will continue to decelerate in 2016 as a result of high debt, excess industrial capacity and poor external demand. In some Asian countries, the debt levels have reached more than 150% of GDP. Japan for instance, its debt level has now reached near 400% of its GDP. Malaysia’s debt is now over 200% of GDP and surprisingly Indonesia is below 100% level.
Interesting updates have emerged beginning of 2016, where Malaysia’s central bank has cut the statutory reserve requirements (SRR) from 4% to 3.50%, as an effort to increase liquidity in the market and also serves as a credit creation measure. The market now anticipates further cuts throughout 2016, with a probable OPR cut towards the end of 2016. As of December 2015 the foreign holdings of the govt bonds including the t-bills was around 46%..
In an effort to pump money into the market, Japan BoJ has also cut its interest rate. In which it turns out to be a good news for emerging market economies, whereby investors could be seen shifting to EM in searching for higher yields. EM countries, particularly Indonesia, India and Mexico are leading in terms of foreign inflows in their government bonds so far in 2016. In Indonesia, the majority of foreign inflows occurred after Bank Indonesia reduced policy rates by 25bp in January 2016.
2016, as everyone predicts, will be another year of sluggish growth for the global economy as well as volatility in the bond market.
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