Catastrophe Bond Issuance Pushes Overall Market To Almost US$50 Bil

Economic

Bond

Summary:

Catastrophe-bond issuance rose to a record this year, increasing the overall market to almost US$50 billion (RM224.49 billion), as insurers transferred more risk from costly climate disasters to private investors.

(Dec 24): Catastrophe-bond issuance rose to a record this year, increasing the overall market to almost US$50 billion (RM224.49 billion), as insurers transferred more risk from costly climate disasters to private investors.

Sales of bonds earmarked for supplemental coverage of large windstorms, earthquakes and other events totalled US$17.7 billion, up 7% from the previous record set a year ago, according to Artemis, which tracks the market for insurance-linked securities. The figures include cyber risk and private transactions.

“The cat-bond market had another year of strong growth,” said Tanja Wrosch, head of cat-bond portfolio management at Zurich-based Twelve Capital AG. “Larger, more diverse and deeper markets are key to the success and sustainability of cat-bond solutions and investment strategies.”

Cat bonds reward buyers for taking on insurance-market risk linked to natural calamities. If a predefined event occurs, bondholders can suffer hefty losses. If it doesn’t, they can earn double-digit returns.

Insurers and other issuers have become more eager to issue cat bonds, partly because of higher inflation, which has made it more expensive to rebuild properties destroyed in storms and other catastrophes. At the same time, insured losses have been rising as climate change stokes more extreme weather events.

This month, Allstate Corp finalised the second-largest cat-bond deal in its history, obtaining US$650 million of reinsurance protection against storms, wildfires and other natural perils. The deal was about 86% larger than the initial target, according to Artemis.

Cat bonds continue to pay out more than many fixed-income assets. This year, investors are on track to earn returns of 16%, compared with a record 20% in 2023.

The yield on a catastrophe bond consists of a risk spread, plus the existing money-market fund rate. Investors have benefited from both attractive risk spreads and higher money-market yields of 4.5% to 5%, up from 0.25% or less during the pandemic.

There were sharp swings in the risk spread during 2024, partly because of sudden changes in the availability or scarcity of capital. It’s a market dynamic that’s growing in importance relative to underlying risk fundamentals, Wrosch said.

Twelve Capital expects the risk spread to be in the 5%-to-7% range next year. It was as high as 8.4% in 2024, according to data from Artemis.

Wrosch said cat-bond investors “can expect high single-digit to low double-digit gross returns” in 2025. Analysts at Plenum Investments AG, another Zurich-based cat-bond investor, are forecasting similar gains.

Cat bonds are designed to be shock absorbers for so-called tail events, which are rare but highly damaging weather-related disasters. Now, insurers increasingly want to use the securities to backstop rising losses from lesser but more-frequent hazards such as wildfires and thunderstorms. These events may have a modest impact individually, but they can cause large insured losses in aggregate.

While the scientific models underpinning so-called secondary perils have improved, they aren’t nearly as reliable as earthquake or hurricane models. That makes it harder to calculate risks. It remains to be seen whether cat-bond investors will be willing to bet on bonds that include aggregate losses, rather than bonds for single-occurrence events such as a Florida hurricane.

“We still see investors showing a stronger preference for occurrence structures,” Wrosch said. “This is certainly true for us.”

Even so, the surge in aggregate losses is a dilemma the insurance industry needs to tackle. In a recent report, Twelve Capital pointed out that most insured losses from natural catastrophes won’t be from hurricanes this year but from wildfires, tornadoes, floods and other non-peak disasters — and they’ll exceed US$50 billion.

“Secondary perils remain very active with another year of heavy tornado and hail losses, in what may be a ‘new normal’ for this peril,” according to Twelve Capital.

Source: Theedgemarkets

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Shares in Mainland China and Hong Kong were among the best performers, while those in Japan were mixed. Taiwan Semiconductor Manufacturing Co. touched a new record high, while Honda Motor Co. jumped after announcing a share buyback. European stock futures dropped, while their US counterparts were little changed.

“The rally in 2024 is very concentrated in technology, and that is expected to be sustained in 2025,” Ecaterina Bigos, chief investment officer for Asia ex-Japan core investments at Axa Investment Managers Asia Ltd., said on Bloomberg Television. “What we will be looking for in 2025 is the broadening of earnings and a rally that is not as concentrated.”

MSCI’s Asian equity benchmark is still headed for its first quarterly loss since September 2023, losing 6.8% over the period, even as the S&P 500 has risen 3.7%. Sentiment has soured in Asia in recent months due to concerns over higher global tariffs threatened by US President-elect Donald Trump, a stronger dollar and China’s lackluster economic recovery.

Nissan Motor Co. shares slid as much as 7.3% in Tokyo after the company confirmed it’s in talks with Honda over a possible business integration. Honda climbed as much as 14% after saying it will buy back as much as ¥1.1 trillion ($7 billion) of its stock.

TSMC rose as much as 1.4% in Taipei, briefly surpassing its Nov. 8 peak, after gains in US chip stocks including key customer Nvidia Corp. The shares are now up more than 80% this year.

Overall, Tuesday’s session was relatively quiet, with trading in markets including Australia, Hong Kong and Singapore shortened for Christmas Eve. Most markets will be closed Wednesday except mainland China and Japan.

Treasuries were little changed in Asia, while Bloomberg’s gauge of the dollar edged higher. The yen fluctuated amid meager volumes as Japanese finance minister Katsunobu Kato warned about excessive foreign-exchange moves.

Japan’s currency remains at risk of extending this year’s losses though with Bank of Japan Governor Kazuo Ueda due to deliver a speech Wednesday and the central bank releasing more details of last week’s policy meeting Friday.

“The consensus expectation is for Ueda to sound dovish, similar to what we have heard from the BOJ of late,” said Tony Sycamore, a market strategist at IG Australia Pty. “However, there is a risk he sounds more hawkish to stabilize the free-falling yen – a move which would catch markets off guard on a day when volumes will be paper thin.”

In China, policymakers are planning to sell 3 trillion yuan ($411 billion) in special treasury bonds in 2025, an increase from 1 trillion yuan this year, Reuters reported Tuesday, citing two sources it did not name.

South Korea data published Tuesday showed consumer confidence dropped this month by the most since the outbreak of Covid-19, battered by the political turmoil triggered by President Yoon Suk Yeol’s declaration of martial law and his impeachment. The nation’s Kospi stock index fell Tuesday and is among the worst-performing major benchmarks in Asia this year.

On Wall Street, the S&P 500 closed up 0.7% and the Nasdaq 100 rose 1%, while a gauge of US-listed Chinese shares gained 0.9%.

The S&P 500 is on its way to record a stellar annual return and back-to-back years of more than 20% gains. The index has risen about 25% since the end of 2023, with the top seven biggest technology stocks accounting for more than half of the advance.

Oil climbed in thin trading ahead of the holidays after a three-day selloff, with focus on a strengthening dollar and President-elect Donald Trump’s roiling of international politics. Gold edged higher.

Source: Bloomberg

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KUALA LUMPUR (Dec 24): Malaysia’s producer price index (PPI) declined by 0.4% in November 2024, a slower decrease compared to the 2.4% drop in October 2024, mainly due to the continued contraction in the mining sector, according to the Department of Statistics Malaysia (DOSM).

Chief statistician Datuk Seri Dr Mohd Uzir Mahidin said the mining sector fell by 8.3% in November 2024, compared to a sharper decline of 17.3% in October 2024, driven by a 14.8% decrease in the extraction of crude petroleum index.

“The manufacturing sector recorded a smaller decline, a drop of 1.8% compared to a 2.6% decrease in October 2024.

“This was largely due to lower prices in the index of manufacture of coke and refined petroleum products (-16.8%); manufacture of chemicals and chemical products (-5.1%),” he said in a statement on Tuesday.

Conversely, Mohd Uzir noted that the agriculture, forestry, and fishing sector surged by 21.8%, up from 13.8% in October, led by a 37.7% increase in the growing of perennial crops index.

Month-on-month, the chief statistician said the PPI rose by 1.4%, supported by an 8.5% gain in agriculture and a 5.7% rebound in mining, with notable increases in the extraction of natural gas (14.2%) and crude petroleum (2.7%).

Elaborating further on the PPI local production by stage of processing, Mohd Uzir said the finished goods index rose by 0.4% in November 2024, driven by a 1.3% increase in the capital equipment index.

Meanwhile, the crude materials for further processing index declined by 2.0%, primarily due to a 2.4% drop in non-food materials, and the intermediate materials, supplies and components index fell slightly by 0.2% due to the 4.2% decrease in processed fuel and lubricants.

Looking at selected countries, Mohd Uzir said the PPI of the US rose by 3.0%, driven by the final demand index, while Japan’s 3.7% increase was attributed to higher costs in agriculture, forestry, and fishery products.

He added that the UK recorded a 0.6% decline due to lower chemical costs, while China continued its deflationary trend with a 2.5% contraction, marking its 26th consecutive month of deflation as Beijing implemented measures to stabilise the economy ahead of the year-end.

Regarding Malaysia’s current selected commodity prices, Mohd Uzir noted that global crude oil prices experienced fluctuations due to factors such as supply decisions by major oil producers and concerns over global demand, as reported in the International Energy Agency’s November 2024 Oil Market Report.

“Overall, Brent crude oil prices ranged between US$71 to US$75 per barrel during the month. While global crude oil prices declined due to oversupply and economic concerns, Malaysia’s prices increased, supported by currency strength and regional demand dynamics.

“Meanwhile, according to the Malaysian Palm Oil Council (MPOC), Malaysia’s crude palm oil prices are hovering around RM5,000 per tonne this month, supported by uncertainties in export supply and a decline in production,” he added.

Source: Theedgemarkets

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(Dec 24): Chinese authorities have agreed to issue three trillion yuan (US$411 billion or RM1.85 trillion) worth of special treasury bonds next year, two sources said, which would be the highest on record, as Beijing ramps up fiscal stimulus to revive a faltering economy.

The plan for 2025 sovereign debt issuance would be a sharp increase from this year's one trillion yuan and comes as Beijing prepares to soften the blow from an expected increase in US tariffs on Chinese imports when Donald Trump returns to the White House in January.

The proceeds will be targeted at boosting consumption via subsidy programmes, equipment upgrades by businesses and funding investments in innovation-driven advanced sectors, among other initiatives, said the sources.

The sources, who have knowledge of the discussions, declined to be named due to sensitivity of the matter.

The State Council Information Office, which handles media queries on behalf of the government, the finance ministry and the National Development and Reform Commission (NDRC), did not immediately respond to a Reuters request for comment.

China's 10-year and 30-year treasury yields rose one basis point and two basis points, respectively, after the news.

The planned special treasury bond issuance next year would be the largest on record and underscores Beijing's willingness to go even deeper into debt to counter deflationary forces in the world's second-largest economy.

China does not generally include ultra-long special bonds in its annual budget plans, as it sees the instrument as an extraordinary measure to raise proceeds for specific projects or policy goals as needed.

As part of next year's plan, about 1.3 trillion yuan to be raised through long-term special treasury bonds would fund "two major" and "two new" programmes, said the sources with knowledge of the matter.

The "new" initiatives consist of a subsidy programme for durable goods, where consumers can trade in old cars or appliances and buy new ones at a discount, and a separate one that subsidises large-scale equipment upgrades for businesses.

The "major" programmes refer to projects that implement national strategies such as construction of railways, airports and farmland and build security capacity in key areas, according to official documents.

The state planner NDRC said on Dec 13 Beijing had fully allocated all proceeds from this year's one trillion yuan in ultra-long special treasury bonds, with about 70% of proceeds financing the "two major" projects and the remainder going towards the "two new" schemes.

Tariffs threat

Another big portion of the planned proceeds for next year would be for investments in "new productive forces", Beijing's shorthand for advanced manufacturing, such as electric vehicles, robotics, semiconductors and green energy, the sources said.

One of the sources said the amount earmarked for that initiative would be more than one trillion yuan.

The remaining proceeds would be used to recapitalise large state banks, said the sources, as top lenders struggle with shrinking margins, faltering profits and rising bad loans.

The issuance of new special treasury debt next year would equate to 2.4% of the country's 2023 gross domestic product (GDP). Beijing had raised 1.55 trillion yuan via such bonds in 2007, or 5.7% of the country's economic output at that time.

President Xi Jinping and other top officials met at the annual Central Economic Work Conference (CEWC) on Dec 11-12 to chart the economic course for 2025.

A state media summary of that meeting said it was "necessary to maintain steady economic growth", raise the fiscal deficit ratio and issue more government debt next year, but did not mention specific numbers.

Reuters reported last week, citing sources, that China plans to raise the budget deficit to a record 4% of GDP next year and maintain an economic growth target of around 5%.

At the CEWC, Beijing sets targets for economic growth, the budget deficit, debt issuance and other goals for the year ahead. These targets, usually agreed upon by top officials at the meeting, will not be officially announced until an annual parliament meeting in March and could still change before then.

China's economy has struggled this year due to a severe property crisis, high local government debt and weak consumer demand. Exports, one of the few bright spots, could soon face US tariffs in excess of 60% if Trump delivers on his campaign pledges.

While the risks to exports mean China will need to rely on domestic sources of growth, consumers are feeling less wealthy due to falling property prices and minimal social welfare. Weak household demand also poses a key risk.

Last week, Chinese officials said that Beijing plans to expand the consumer goods and industrial equipment trade-in programmes to include more products and sectors.

Source: Theedgemarkets

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Samsung Electronics' stock was once the crown jewel of Korea, growing alongside the country's economic development. Domestic retail investors believed that, while it might take time, investing in the company would ultimately yield returns even in a bearish market.

Yet, Samsung Electronics' share price has been in a continuous downward trend since peaking at 88,800 won ($61.06) on July 11, plunging to the 54,000 won-level on Tuesday. The announcement of a $4.75-billion grant under the U.S. CHIPS Act provided a slight rebound earlier this week, but the stock shows no signs of anticipated long-term recovery.

The gloomy outlook is most evident in the exodus of foreign capital. Since the beginning of this year, foreign investors have net sold 10.4 trillion won in Samsung Electronics. This figure represents 96 percent of the total trading volume — a significant selling spree even in the context of recent economic challenges after martial law.

Observers largely attribute Samsung’s weak performance to the broader downturn in the chipmaking sector. Despite enjoying a competitive edge in DRAM memory chips for decades, Samsung has been hit hard by an oversupply that continues to drive prices downward.

Simultaneously, the rapid rise of artificial intelligence, or AI, has fueled demand for high-bandwidth memory (HBM) chips. Samsung, caught off-guard by this trend, lagged in HBM development, allowing rival SK hynix to secure a virtual monopoly in supplying these specialized chips to Nvidia.

"The operating environment in the fourth quarter is assessed to have been largely unfavorable," IBK Securities analyst Kim Un-ho said. "The semiconductor division is estimated to have faced weaknesses in both the memory and nonmemory segments."

Samsung Electronics' Decline: What Happened To Korea's Flagship Stock?_1

Workers walk by a Samsung Electronics' chip production plant in Pyeongtaek, Gyeonggi Province, in this September 2022 photo. Reuters-Yonhap

The downturn is hardly new. On Nov. 14, Samsung’s stock slipped to a four-year low, pushing management to announce a 10-trillion won share-buyback plan. Even before that, on Oct. 8, its third-quarter operating profit fell short of estimates, prompting an unusual public apology from the company’s leadership.

Looking ahead to 2025, the outlook remains similarly uncertain. The won-dollar exchange rate has steadied around the 1,400 won range per dollar. With the return of the Donald Trump administration for a second term, a more aggressive tariff regime could be on the horizon.

"Additional U.S. sanctions against China could pose a short-term unfavorable factor in Samsung Electronics' HBM business operating in China," Kiwoom Securities analyst Pak Yu-ak said.

Current estimates for operating profits in the fourth quarter are 9.38 trillion won, a 30.8 percent decline over the same period.

As concerns grow ahead of the company's fourth-quarter earnings announcement in January, the brokerage industry has slashed its target price. According to market tracker FnGuide, Tuesday, the consensus on Samsung Electronics share price stands at 82,125 won — a 20 percent drop compared to three months ago.

"A significant drop in the stock price is unlikely, but the high possibility of downward revisions to Samsung Electronics' earnings consensus suggests that it will take more time for a substantial stock price recovery," iM Securities analyst Song Myung-seop said.

Despite these challenges, analysts still recommend buying. Song added, "The likelihood of a semiconductor price decline cycle has already been largely factored in."

Source: Koreatimes

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FOREX.com

Economic

Forex

US exceptionalism on full display

2024 was the year when the US economy simply wouldn’t quit, roaring back to life just as it seemed activity was rolling over, maintaining its streak of exceptional performance relative to other developed nations, including Japan.

You can see the divergence in the first chart, which shows Citi’s economic surprise indices, a measurement of how economic data performs relative to expectations. A reading above 0 indicates more data than not has topped consensus, with the distance from 0 reflecting the aggregate proportion of surprises.

USD/JPY Fundamental 2025 Outlook Preview_1

Japanese data, shown in red, undershot consensus for large periods in the second half of 2024, coinciding with the BoJ’s move to normalise monetary policy by abandoning yield curve control and lifting overnight rates out of negative territory. In contrast, US economic data, shown in blue, delivered persistent upside surprises over the past two years, apart from a brief dip in mid-2024.

This relative economic divergence, and the subsequent reaction functions from the Fed and BoJ, explains much of the price action seen in USD/JPY in 2024, as the following section outlines.

Comeback’s spark major rates reversal

With US economic data roaring back to life last quarter, it sparked a major recalibration of expectations on how much the Federal Reserve will need to cut interest rates in 2025. Futures shifted from pricing nearly six cuts to fewer than two, contributing to US two-year Treasury yields reversing sharply higher toward levels seen immediately after the US Presidential election.

That event is worth noting as President-elect Donald Trump’s policy mix has been a significant factor behind the sharp rise in longer-dated US Treasury yields, boosting growth expectations and bringing future fiscal deficits into focus. Combined with proposed mass deportations of undocumented workers and one-off impacts from planned import tariffs, perceived inflation risks are skewing higher, including from rising wages.

USD/JPY Fundamental 2025 Outlook Preview_2

The point cannot be reinforced enough: while it will be easy for the Trump Administration to introduce tax cuts and tariffs, delivering offsetting measures to counteract the inflationary impact – such as boosting productive capacity and achieving public sector synergies – will be far more challenging, especially without the threat of industrial action. Such measures could take years to implement.

Key US data to watch

The byproduct of government policy will shape future economic outcomes. For USD/JPY, the key data points to monitor are nonfarm payrolls and core consumer price inflation. While the core PCE deflator is the Fed’s preferred inflation measure, CPI often moves markets more as it includes many components that feed into the PCE measure.

While they don’t carry the same potential to spark volatility, GDP, jobless claims, consumer spending and incomes, along with wage measures such as the Employment Cost Index, are other reports traders should watch. Treasury auctions, given their implications for yields, may also become increasingly influential next year.

The policy mix and trajectory for US economic data will be highly influential on the US interest rate curve in 2025. As the next section explains, it’s also critical for USD/JPY.

Long bonds provide strong leads

The following chart is divided into three panes: USD/JPY on the left, US two, five, and 10-year Treasury yields in the centre, and the rolling daily correlation between the currency pair and various interest rate variables over the past quarter on the right.

USD/JPY Fundamental 2025 Outlook Preview_3

Where US Treasury yields moved last year, USD/JPY almost always followed. This is visually evident and confirmed by the correlation coefficient analysis, showing especially tight relationships with US five and 10-year Treasury yields.

Correlation coefficient scores measure the strength and direction of a relationship between two variables, ranging from -1 to +1. A score near +1 signals a strong positive link, where one rises as the other moves up. A reading closer to -1 shows a strong inverse relationship, while zero indicates no correlation.

While correlation does not imply causation, in this instance, US yields in the belly and back end of the Treasury curve drove USD/JPY moves for much of the year.

US short-end rates and interest rate spreads between the US and Japan were also correlated with USD/JPY, albeit less so than longer-term yields.

There was a weak positive relationship with Japanese 10-year yields, but that likely reflects the impact of US Treasury yield fluctuations on global borrowing costs. All else being equal, one would expect an inverse correlation if there were a meaningful fundamental relationship.

Japanese events an important short-term driver

That’s not to say Japanese data and interest rates don’t matter for USD/JPY. They do, but typically only for short periods when they threaten to disrupt carry trade flows. These flows rely on borrowing yen cheaply and swapping it into higher-yielding currencies. Higher Japanese interest rates can discourage carry trades both on a relative return and FX basis, resulting in capital being repatriated into the yen. When that occurs, it has the potential to deliver powerful USD/JPY downside.

Even though US longer-term rates were highly influential for much of 2024, that doesn’t mean they will always be influential. Market drivers can and do change, as indicated by the black box and dotted black arrows in the chart above.

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Owen Li

Stocks

Economic

Energy

(Dec 24): Malaysia’s utilities stocks still have room to run as electricity demand surges from the proliferation of data centres and electric vehicles, Apex Securities said and told investors to "overweight" the sector.

Data centres alone would require more than 5GW by 2035, Apex Securities said in a sector initiation note. As data centres operate even through the night, the demand would account for over one-third of the total demand and exceed the entire commercial sector in 2023, it noted.

“The surge in data centre growth has reinvigorated electricity demand,” Apex Securities said. For strategy, the house has Malakoff Corp Bhd (KL:MALAKOF) and Tenaga Nasional Bhd (KL:TENAGA) as its top picks for the sector.

Shares of Tenaga, which has a near-monopoly on the country’s electricity distribution, and other utilities have rallied this year on the back of strong economic growth that boosted demand for power.

News reports of new power-hungry data centres mushrooming in Malaysia have also boosted investor sentiment and most analysts are also bullish on Tenaga and Malakoff.

Electric vehicles

Meanwhile, a slew of policies including import duty exemptions and income tax reliefs as well as the expansion of charging infrastructure have also lifted sales of electric (EV) and hybrid vehicles.

“As adoption continues to gain momentum, EVs are expected to play an increasingly critical role in shaping future electricity demand,” Apex said.

Replacing just 5% of the petrol consumption with EVs would result in more than 6,800GWh of demand, equivalent to 5.5% of the total annual electricity demand in 2023, according to the research house’s estimates.

“These estimates underscore the significant impact that EV adoption could have on Malaysia's electricity demand,” Apex said. “As the nation progresses toward its EV adoption targets, it is crucial to prepare the electricity grid for this additional load.”

Other beneficiaries

“The sector is set for robust growth, driven by rising electricity demand from data centres, the electrification of vehicles, and the ongoing energy transition,” the house said.

The entire electricity supply chain would benefit from the demand, such as cables and wire suppliers like Southern Cable Group Bhd (KL:SCGBHD) and underground utilities engineering firm UUE Holdings Bhd (KL:UUE), Apex noted.

Solar panel installers such as Solarvest Holdings Bhd (KL:SLVEST), Samaiden Group Bhd (KL:SAMAIDEN) and Pekat Group Bhd (KL:PEJAT) are also well-positioned to capture opportunities from the growing adoption of solar energy, it added.