Market expected to remain 1,375-1,400 points until state elections in August: Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

The local stock market ended the week on a lower note as cautious sentiments took hold of the market wand resulted in profit taking after two weeks of gains.  The benchmark KLCI Index ended the week at 1,377.67 points (-13.22 points or -0.95%).

However, trading activity and value continues to be lackluster at RM1.53 billion per day from RM1.65 billion per day last week as investors mostly chose to sit on the sidelines and wait for positive developments.

The overall trading value for the week remains 20% below the past 100-day average daily trading value of RM1.91 billion per day.

In the bond market, bond yields across the board rose as bond fund managers and traders continued to factor in another potential 25 basis points rate hike by the US Federal Reserve at its upcoming Federal Open Market Committee later this month on 25-26 July 2023.

The Labor Department reported that the unemployment rate declined to 3.6% from 3.7% in May while wages increased by 4.4% on an annual basis even though non-farm payrolls rose by 209,000 which was below market expectations of 240,000 jobs. The US Federal Reserve had earlier indicated that a strong labor market would be a key consideration driver for future interest rate hikes.

The 10-year US Treasury (UST) yields skyrocketed by 32 basis points to 4.06% from 3.74% in the previous week and caused the total yield gains over the past 52 weeks to rise to 96 basis points.   

The UST 2-year yields also rose by 20 basis points to 4.95% from last Friday’s close of 4.75%. This continues the yield curve inversion between the UST 2-year and 10-year notes into its 51st consecutive week with the yield spreads narrowing to -89 basis points from -99 basis points last week.  

The 10-year MGS bond yield rose by a further eight (8) basis points last week to 3.90% last Friday from 3.82% in the previous week. The yield spreads between both countries’ 10-year bonds once again moved into a negative carry position of -16 basis points from +8 basis points last week.    

ECONOMICS

Bank Negara Malaysia’s (BNM) international reserves fell to US$111.4 billion as at 30 June 2023 from US$113 billion on 15 June 2023.

The reserves position is sufficient to finance five (5) months of imports of goods and services and is one (1) time the total short-term external debt.

The main components of the international reserves were foreign currency reserves (US$99.2 billion), International Monetary Fund reserves position (US$1.4 billion), special drawing rights (SDRs) (US$5.7 billion), gold (US$2.4 billion) and other reserve assets (US$2.7 billion).

BNM’s Monetary Policy Committee (MPC) has maintained the Overnight Policy Rate (OPR) at 3.00% and disclosed that the current monetary policy stance is slightly accommodative and remains supportive of the economy.

The central bank added that there are limited risks of future financial imbalances and the MPC will remain vigilant to ongoing developments and ensure that the monetary policy stance remains conducive to sustainable economic growth amid price stability.

BNM explained that the global economy continues to expand, driven by resilient domestic demand supported by strong labour market conditions, however growth rates are impacted by persistent core inflation and higher interest rates.

The downside risks to growth comes from a slower momentum in major economies, higher-than-anticipated inflation outturns, an escalation of geopolitical tensions and a sharp tightening in financial market conditions.

Growth for the local economy for the remainder of 2023 will continue to be driven by resilient domestic demand with household spending continuing to be underpinned by favourable labour market conditions, particularly in the domestic-oriented sectors. BNM also foresees both headline and core inflation to trend lower for the second half of 2023.  

CURRENCY

The Ringgit ended the week generally flat against other major currencies. It was unchanged against the Japanese Yen at RM3.30 /JPY100 but gained slightly against the US Dollar at RM4.6670 / USD1.00 (-0.70sen) and the Singapore Dollar at RM3.4530 / SGD1.00 (-0.40sen).  On the flip side, it ended marginally lower against the British Pound to RM5.9540 / GBP1.00 (+0.60sen) and the Euro at RM5.0820 RM5.0810 / EUR1.00 (+0.10sen). 

MY OPINION

The KLCI Index continued with its range bound trading last week due to a lack of catalysts. Judging from the lackluster trading activity, I believe that a lot of traders and investors are holding back due to the upcoming state elections in Selangor, Negeri Sembilan, Penang, Kedah, Kelantan and Terengganu on 12 August 2023 which is expected to be very tightly contested.

Therefore, I expect the market to remain range bound trade between 1,375 -1,400 points until the middle of August 2023.  

The UST and MGS yields spreads returned into negative territory once again following the spike in UST yields last week. This is a point for concern in the near term as a wide negative carry would make the MGS bonds comparatively unattractive and push yields back above the 4.00% level in the coming weeks should an 25 basis points hike by the US Federal Reserve materialize later this month.  

The foreign exchange market seems to have calmed down after BNM said it will intervene into the market if it detects any unusual movements for the Ringgit.

Therefore, the next major developments that will impact the forex market would be the monetary policy decisions of the major central banks across the world. In light of this, I am maintaining my forecast on the US Dollar trading band at between RM4.60 – RM4.70 in the coming week.  - DagangNews.com