Financial market volatility to persist in near term, says Bank Negara

PETALING JAYA: Financial market volatility is expected to remain elevated in the near term as a resumption in the rise of Covid-19 infections in several countries will continue to weigh on financial markets and heighten trading swings.

Bank Negara Malaysia (BNM) said investor sentiment could also turn more cautious on weaker-than-expected corporate earnings and an escalation of trade tensions.

In its Financial Stability Review – First Half 2020 (H1’20) report, the central bank said the movement control order and weak external demand conditions have led to a contraction in economic activity which also resulted in higher levels of domestic market stress in H1’20.

“Policy interventions by BNM served to maintain orderly conditions within the foreign exchange, bond, and money markets during this period, with conditions largely normalising by the end of H1’20,” it said.

BNM’s open market operations, which included the purchase of government securities, helped to contain potential market dislocation and smoothen excessive volatility in the bond market, further aiding the market’s recovery from the period of heightened volatility and significant capital outflows at the onset of the Covid-19 shock. The reduction in Statutory Reserve Requirement also continued to ensure ample liquidity to support effective intermediation and orderly market conditions.

In the domestic equity market, non-resident (NR) outflows have persisted, amounting to RM20.3 billion (US$4.7 billion) up to end-August 2020 on heightened investor concerns over the economic impact of the pandemic. The impact on equity prices was however offset by a higher participation of domestic retail investors in the equity market, and a strong rally in healthcare and technology stocks.

Of note, retail investors drove trading value and volume on the local bourse, overtaking domestic institutional investors, although more recent profit-taking activity since August has led to some price correction.

“While market volatility has subsided from the peak observed in March, it remained above levels observed prior to the crisis as markets remain sensitive to newsflows around Covid-19, the escalation of trade tensions, and domestic political developments,” said BNM.

The domestic bond market experienced a temporary spike in bond yields with 10-year Malaysian Government Securities (MGS) and 10-year ‘AAA’ corporate bond yields rising by 84 bps and 59 bps respectively, amid significant NR outflows (RM22.4 billion or US$5.2 billion) between February and April.

Cumulative NR outflows which peaked in April 2020 have since reversed to record a RM4.3 billion (US$1.1 billion) net inflow until end-August 2020 amid the gradual improvement in global investor sentiment and a continued stable base of NR investors in the domestic bond market.

Sustained demand by domestic investors for Malaysian government bonds was supported by BNM’s measures to ease liquidity conditions, reflected in the bid-to-cover ratio which averaged at 2.4 times in the first seven months of 2020. However, auctions for long-term bonds since August saw a slight tapering in demand.

Along with the more accommodative monetary policy, this has seen MGS yields gradually retreat from the sharp increase observed in March. The corporate bond market continued to function smoothly with credit spreads for 10-year ‘AAA’ papers normalising to around 54 bps after reaching a peak of 105 bps in April.

Net corporate bond issuances have recovered as firms sought to shore up liquidity while taking advantage of lower borrowing costs, although they are below 2019 levels.