G20 meeting recap—investment takeaways for Asian fixed income

Risk appetite improved as the G20 summit in Osaka fueled optimism for a moderate de-escalation of trade tensions between the United States and China. We believe fixed-income assets are reacting conservatively to the positive outcome of the G20 meeting—a reflection of investors’ cautious confidence.

What are the key takeaways you see from the G20 meeting?

The number one key takeaway we see is the re-engagement in trade talks and negotiations between China and the United States; tensions are not escalating further, decreasing the likelihood of significant economic deterioration scenario. Hence, from a big picture perspective, it’s a positive development. The second takeaway is the United States agreeing to partially remove restrictions against a leading Chinese telecommunications equipment maker.¹ This indicates that slightly cooler heads are starting to prevail. Overall, the G20 meeting has so far had a modestly positive impact on the market.

Do you see the market taking relief (i.e. turning more risk-on) from the G20 meetings? What are you seeing from the Asian bond market so far?

In the last 36 hours (as of  July 2, 2019), we noticed DM rates are modestly higher. Some Asian currencies are strengthening, such as the Philippine peso, Indian rupee and Chinese renminbi. The exception is the Japanese yen.² That helps to confirm a potential “risk-on” environment, in which we typically see the Japanese yen weakens, Asian currencies strengthen, and rates in developed markets trend higher.

We believe that fixed-income assets are reacting conservatively to the positive outcome of the G20 meeting—a reflection of investors’ cautious optimism. Firstly, the market is digesting the big headlines but lacking details. Secondly, with further meetings and follow-up talks in the pipeline there could be yet more unexpected changes.

Our big-picture view is that the expectations of how many rate cuts we’re going to get from the Fed were overdone. As a result, we’re more in favor of Chief Economist Frances Donald’s expectation for two rate cuts in the second half of 2019 (conditional on further U.S. economic deterioration) than bond market expectations of up to four rate cuts in the next year. In our view, when expectation scales back, it could trigger parts of the rate curve to be repriced higher.

Do you foresee more volatility for Asian bond markets in 2019?

We’re expecting selected key Asian currencies to keep strengthening, and we continue to see more inflows into the region supported by interest rate differentials and sound fundamentals. Increasingly, we’re seeing binary opportunities emerging in this region that we could capitalize on, no matter how tensions play out. If China and the United States come to an agreement, that will be favorable for Asian trade. Even if they can’t reach an agreement but at least keep talking and negotiating, we could expect potentially slower U.S. growth and the rate-cut scenario would still materialize.

 

 

1 Remarks by President Trump in press conference,” the White House Office of the Press Secretary, June 29, 2019. President mentioned letting U.S. companies resume sales to China’s largest telecommunications equipment maker. China and the United States will be talking about taking the maker off the Commerce Department entity list. 2 Bloomberg, as of  July 2, 2019.  

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Endre Pedersen

Endre Pedersen, 

Deputy Chief Investment Officer, Global Fixed Income

Manulife Investment Management

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