Malaysia's financial market remains orderly despite volatility in global markets

The central bank, in its Financial Stability Review report for 2H2021 published on Wednesday, said the global financial markets experienced increased volatility in 2H2021 which continued into 2022.

"This was largely driven by expectations of monetary policy normalisation in the United States (US), tensions from the military conflict in Ukraine and continued challenges from the COVID-19 pandemic.

"Domestically, a surge in COVID-19 cases and the rise in global bond yields also led to some market stress," it said.

On the domestic front, it said the financial market stress index (FMSI) rose in July and again in late September before gradually declining towards the end of 2021.

"Escalating geopolitical tensions towards the end of February 2022 further contributed to the risk-off sentiment in global markets including Malaysia.

"Despite these developments, domestic stress levels remained well below the levels observed at the onset of the COVID-19 pandemic between March and April 2020," it said.

BNM said the domestic bond yields are likely to experience further upward pressure amid monetary policy normalisation in the US and similar market expectations domestically coupled with the anticipation of a higher incoming government bond supply.

It said this could lead to higher borrowing costs for financial institutions, businesses and the government.

"Conditions in domestic financial markets are, however, expected to remain orderly.

"This will continue to be supported by Malaysia's deep and liquid bond market, diverse investor base as well as positive real yields," it said.

The central bank said the local bond market continued to record non-resident inflows, with the government bond market recording non-resident net inflows amounting to RM17.4 billion between July 2021 and February 2022.

"This was due in part to yield seeking activities and the increase of Malaysia's weightage in the JP Morgan Government Bond Index-Emerging Market (GBI-EM)," it said.

On the equity market, BNM said it cautioned risks of heightened domestic market volatility to remain amid geopolitical tensions.

"Actions by major commodity buyers and producers may also influence prices of commodity-related stocks.

"These factors, against a backdrop of rising global interest rates and domestic risk factors, could pose risk to domestic equities in 2022," it said.

On the ringgit, the central bank said the local note depreciated by 1.2 per cent between July 2021 and February 2022 to close at 4.1993 against the US dollar, in line with the movements of other regional currencies.

Looking ahead, it said movements in the ringgit exchange rate are expected to be influenced by stronger domestic economic recovery, further monetary policy normalisation in the US and developments surrounding the military conflict in Ukraine.