29 October 2020 by jbchevrel
Malay CDS largely benefitted from Asian risk’s outperformance in 2020. Stunningly, the Chinese equity benchmark CSI 300 is close to the highs of the year. It was up today. And up yesterday. The yuan had a very strong run too. Offshore yuan (CNH) per dollar came from 7.2 this spring to 6.7. 10y CGBs offering nominal 3% compared to DM rates is attractive to some. 10y real rates in the US are close to -1%. Asian CDS have been very firm since spring, outperforming their EM peers at times when the market widened. On the idiosyncratic side of things, Bank Negara Malaysia (BNM) is expected to cut its policy by another 25bp to 1.5% on November 3. Activity data have improved from the historic Q2 contraction, given the economic re-opening. That should fade in Q4, though, as downside risks have materialized given the resurgence in COVID cases both globally and locally. The Malaysian government has re-imposed a lockdown and mobility has already dropped in economic centres. Political risks have also resurfaced, which could hurt business sentiment and investment spending, going forward. That is the backdrop against the BNP is expected to ease policy next week. Although downward pressure on real yields should not be positive for sentiment, the main driver is likely to be South East Asia economic performance, going forward. The fact that CDX EM has now inched closer to ‘cheap territory’ is a technical which, if sustained, could prove negative for Malay CDS as it would maintain demand for protection. Today the CDX EM skew closes at -8cts from around -30cts last week.