Germany weighs fiscal stimulus; China govvies are attractive
Recession fears in the market have deepened, but the silver lining is that this has now triggered consideration of more forceful policy responses. Der Spiegel reported on Friday that the German government is looking to relax its zero-deficit rule in the event of a recession. Over the weekend, Fin Min Scholz further raised the possibility of an additional EUR50bn of spending in a crisis, or 0.4% of Eurozone GDP. While stimulus is not imminent , the softening of Germany’s hard budgetary stance helped lift equities and bund yields, bolstering EUR/USD to test 1.11. Given Germany’s negative yields and a debt-to-GDP ratio below 60%, any increased German spending is likely viewed as fiscally sustainable.
The US Commerce Department has extended exemptions for US companies to do some business with a blacklisted Chinese telecoms manufacturer for 90 days. Limited sanctions reprieve offered by the US is one small step to widening the door for a trade deal, but talks are shaping to be a journey of a thousand miles. USD/CNY may stabilize around 7.00-7.10 as trade tensions ebb a little.
Rates: Relatively high China bond yields
We think that China govvies are attractive in this low yield environment. China government bonds have underperformed US Treasuries significantly with the yield premium in the 10Y tenor widening out to 142bps (compared to 59bps at the start of the year). This seems counterintuitive given that Chinese data (retail sales, industrial production and loan growth) have been showing much more signs of stress compared to the US. However, this neglects the point that the People’s Bank of China (PBoC) has been more cautious in disbursing monetary stimulus in the current slowdown compared to previous economic downturns. Notably, the weighted average OMO rate and the 7D repo have been heading sideways as the PBoC keeps liquidity neutral. We still think that targeted easing is in the offing, which could spark more sizable capital gains in govvies.Even if that does not materialise, returns from coupons should still be sufficiently attractive.
The PBoC’s has announcement that new loans should be priced against a revamped benchmark Loan Prime Rate (LPR) from the 20th of August (see here) marks another step towards interest rate liberalization. The LPR provides the financial sector with more leeway to set interest rates (relative to the PBoC’s medium term lending operations rate) in contrast to the existing benchmark 1Y lending rate, which is a much blunter tool used by the PBoC. As banks start to use the LPR, the benchmark 1Y lending rate would lose importance. The PBoC appears concerned that lending rates are diverging (rising) despite stable benchmark rates. If this new mechanism works, we should see the weighted average lending rate fall.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422