BlackRock Asia Weekly Market Views

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Weekly Highlights

• Over the past two weeks, Asian Credit returns were modestly positive with the compression of spread premiums outweighing losses due to negative treasury returns. While the risk of economic recession is now priced out of the market, investor sentiment remains relatively cautious and cash levels remain high. The big winners of any renewed risk-on sentiment were Indonesia and select frontier markets: Indonesian credit benefitted from the improvements in investor sentiment following monetary easing from Bank Indonesia and Mongolia rallied on the back of strong performance in the commodity complex. The Asian local bond market saw strong performance as well with a stable CNY fixing and the turn in broader emerging market flows. The slower pace of Fed tightening and at the same time reduced expectations of a sharp economic slowdown is a more benign backdrop for Asian currencies. The Indonesian rupiah benefitted from renewed optimism as described above and Indian rupee performed well with the new budget welcomed by investors.
• China has been in the news a lot over the past two weeks. On the data front, negative headlines around weaker PMI and trade data is mostly due to seasonality in our view and is less of a concern. The weaker Chinese trade data point today was shrugged off by the market and we see little impact to the renminbi. The PBoC announced significant liberalization in access to the Chinese Interbank Bond market and effectively removed the need for eligible offshore investors to use the Quota schemes. While the timing was a surprise, this is yet another step which was expected at some point in the liberalisation of the Chinese capital markets.  Near term, it is likely to calm fears of a significant devaluation in the currency but it will also have implications for the longer term viability of the offshore “dim sum” market.
• Last week, Moody’s changed their outlook on China’s Aa3 government bond rating to negative from stable but affirms the sovereign’s Aa3 rating. This has muted impact to market performance. On the sovereign debt, a single notch downgrade has limited implications with foreign investors accounting for less than 2% of the market. In credit, the change in view extends to some central SOEs as well whose credit ratings are linked to the high government support assumed by rating agencies. However, the market has already priced some of these risks in with Chinese quasi-sovereign credit historically trading wider than equivalently rated credits in the rest of Asia and this explains the muted market reaction to the announcement.
• The recently released NPC work report for 2016 continues to set a relatively high growth target at 6.5%-7% for 2016 which is to be supported by further policy easing, likely through the fiscal channel. The budget report pledged to lift the fiscal deficit to 3% of GDP this year from last year’s 2.3% and comments from the PBoC’s governor in the G20 meetings indicate a dovish bias to monetary policy as well. The authorities appear committed to their targets and the announcement of these additional stimuli should continue to inject optimism into the market.

Country views from the BlackRock Asian Fixed Income Team