STAR Insight , Market Update 17 Mei 2021

Inflation fear resumed

  • US market corrected as inflation topped estimates
  • Recovery in India likely be stalled by the pandemic
  • JCI gained while regional market corrected during Holiday

US market corrected after inflation came above expectation
The market expected US inflation would accelerate to 3.6% in April, from 2.6% in March. However, data released last week showed that inflation in the US reached 4.2% YoY in April, above market expectation and The Fed’s inflation target of 2% for FY21. Following this data release, S&P500 dropped 2% on Wednesday, resulting in a 1.4% correction for the week despite a technical rebound later last week. US 10Y bond yield increased 5.13bps last week while US Dollar Index increased slightly by 0.1%. We believe the sentiments in the US equity and bond market would remain negative this week as inflation came in higher than expected while economic recovery is likely slower than previous estimates.

India’s once-in-a-century budget faces a crisis due to the re- emergence of COVID-19
India’s annual budget was expected to allow the country in reviving the economy. However, the second wave of Covid-19 in India brings fear that the expectation will flop. According to Moody’s Rating, the severe second wave of Covid-19 pandemic in India will slow the near-term economic recovery. Thus, the agency cut India’s 2021 GDP growth forecast from 13.7% to 9.3%. The health crisis has also hit the Indian bureaucracy badly with many key officials infected by the coronavirus, slowing decisions on privatizations, among other proposed reforms. The delays will affect a series of other privatization plans including two banks, insurance, and energy companies, that are at the center of reforms proposed by the budget and that is key in achieving the roughly $24 billion target from privatizations and asset sales. Lockdowns will start affecting tax collections by June, potentially lowering revenues by 15%-20% from what was estimated for the quarter. With the projected fiscal deficit target pegged at 6.8% of gross domestic product and a soaring borrowing program, delays in the privatization plan and the anticipated shortfalls in tax revenues are already prompting cuts to some of the government’s previously earmarked expenses.

JCI posted a minor gain on two trading days last week
With only two trading days last week, JCI posted a minor gain of 0.2% while the regional market corrected. Due to limited positive sentiments in the domestic market, un-exited 1Q21 earnings results, and fear of soaring Covid-19 new cases post Lebaran, we see further downside risk for JCI this week. Indonesia’s 10Y government bond yield increased slightly by 2bps while the spread to US 10Y treasury yield narrowed to 4.80%. Without external shock from the US treasury movement, we expect 10Y government bond yield would move sideways this week.