KLCI: A major positive catalyst needed to reach 1,400 level and above - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

FOLLOW through selling by foreign fund managers continued to push the local stock market lower last week but it managed to close above the 1,375-point support level. I am maintaining my view that the KLCI will trade between the 1,375 -1,400 points range in the coming week.

A relief rally can only carry it to the 1,400 level as it will need a major positive catalyst to go above it. On the contrary, if it falls below the 1,375-point support level, the next major support for the market would be 1,350 points and 1,300 points respectively.        

The performance of the bond market last week was also within my expectations as both the UST and MGS yields came in within the +/-10 basis points range.

Nevertheless, it is concerning that the negative carry of the 10-year MGS against the 10-year UST continues into its third week as either one or even both bonds have a potential to make a large one-off yield swing should the FOMC meeting decides to raise interest rates.   

The Ringgit was on its back foot as foreign currency traders continue to prepare for a surprise 25 basis points hike at the upcoming FOMC meeting as the US labour market and consumer demand has remained robust despite the series of hikes to the FFR since the start of 2022.

The element of fear came after the Reserve Bank of Australia (RBA) took the financial market by surprise through by raising the Official Cash Rate (OCR) by 25 basis points to 4.10% at their policy meeting last week despite the market consensus predicting the RBA to hold the OCR at 3.85%.

In addition, the Bank of Canada also raised its overnight rate by 25 basis points to 4.75% which is a 22-year high due to the abovementioned factors that is stoking inflation.

Given the recent developments, I am of the view that the US Federal Reserve could surprise the market and raise the FFR by another 25 basis points this week.  

MARKET

The local stock market continues to slide lower on weaker sentiment and investor concerns over a potential rate hike to the Federal Funds Rate (FFR) at the upcoming Federal Open Market Committee Meeting (FOMC) on 13-14 June 2023.

Unsurprisingly, the benchmark KLCI Index ended the week lower at 1,376.08 points (-5.18 points or -0.37%).

 Trading value normalized back to the previous week-on-week average of RM1.69 billion per day from RM2.58 billion per day last week following last week’s FTSE Bursa Malaysia Index rebalancing exercises by institutional fund managers.

The overall trading value for the week goes back to 15% below the past 100-day average daily trading value of RM2.00 billion per day.

In the bond market, US bond yields rebounded back as bond fund managers remain uncertain over the potential outcome of the FOMC meeting this week.

Meanwhile, first-time filings for unemployment benefits hit 261,000 for the week ended 3 June 2023 and was also the highest level for weekly claims since 20 October 2021.

The 10-year US Treasury (UST) yields rose by four (4) basis points to 3.74% from 3.70% in the previous week and the total yield gains over the past 52 weeks narrowed to 58 basis points.   

The UST 2-year yields also appreciated by eight (8) basis points to 4.59% from last Friday’s close of 4.51%. This continues the yield curve inversion between the UST 2-year and 10-year notes into its 48th consecutive week with the yield spreads widening to -85 basis points from -81 basis points last week.

The 10-year MGS bond yield rose by three (3) basis points last week to 3.72% last Friday from 3.69% in the previous week. The yield spreads between both countries’ 10-year bonds remains in negative territory for the third consecutive week at minus two (-2) basis points from (-1) basis points last week.  

ECONOMICS

Bank Negara Malaysia (BNM) is working four (4) other ASEAN countries - Indonesia, Philippines, Singapore and Thailand to establish a multilateral platform for cross-border payment connectivity. The aim of the project to make transactions across borders to be as efficient as the domestic payment system.

The World Bank raised its 2023 global growth to 2.1% from its earlier forecast of 1.7% that was made in January 2023 as the economies of major countries such as the US and China have held up better than expected. However, it reduced its 2024 global growth forecast to 2.4% from 2.7% as it expects the effects of central bank monetary tightening and more restrictive credit condition to slow growth from the second half of 2023 onwards and impact 2024. In addition, the World Bank expects the global economy to rebound slightly in 2025 to 3.0%. It also added that the recent stress to the banking sector could also potentially contribute to tighter financial conditions in 2024.

RAM Rating Services Bhd (RAM) has maintained its ‘stable’ outlook for the local insurance and takaful sector as it expects the sector is well capitalised to face a changing landscape, market volatilities and the normalisation of claims towards pre-pandemic levels. RAM expects the life and family segment to grow by 8% in 2023 as downside risks recede but prospects for the non-life sector is expected to be flattish at best as car sales are anticipated to decline from last year’s all-time high.

CURRENCY

The Ringgit continued to slide against other major currencies in the run up to this week’s FOMC on 13-14 June 2023 on rising expectations of continued interest rate hikes by the central banks of developed nations.

The local currency lost ground against most currencies with the exception of the Japanese Yen which remained unchanged at RM3.30/JPY100.

The Ringgit weakened against the British Pound to RM5.7890 / GBP1.00 (+9.30sen), the US Dollar at RM4.6130 / USD1.00 (+3.80sen), the Singapore Dollar at RM3.4310 / SGD1.00 (+4.20sen) and the Euro at RM4.9640 / EUR1.00 (+6.50sen). – DagangNews.com

Manokaran Mottain has been an economist with a number of financial institutions and is now managing his own firm, Rising Success Consultancy Sdn Bhd and has been writing his economic analysis on a weekly basis in DagangNews.com since 2022      

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