Razor thin liquidity indicates underlying strength of the local stock market is weak - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE benchmark KLCI Index performed according to my expectations last week when it gave up all of its window dressing gains in the very first day of trading for 2023.

Although it managed to claw back some gains in the latter part of the week due to a boost to sentiments arising from the upcoming lifting of movement restrictions in China, its performance still closely mirrored that of last year’s KLCI index performance.

The benchmark KLCI Index ended the first week of 2023 at 1,480.55 points (-14.94 points or -1.0%). The average daily value traded last week was RM1.67 billion, which is over 10% below the past 100-day average daily trading value of RM1.87 billion.

The razor thin liquidity indicates that the underlying strength of the local stock market is weak as there was very little follow through buying from investors and traders alike.

This virtually means that a pre-Chinese New Year rally won’t be materializing this year unless there is a unexpected positive development materializing over the next two weeks. The next catalyst for the market would be the revised Budget 2023 on 24 February 2023.

Meanwhile, Bursa Malaysia Berhad has amended its business rules and listing requirements to enable it to continue operating the local stock exchange and its subsidiaries on days declared as surprise holidays (public holidays declared in the Federal Territory of Kuala Lumpur that have not been gazetted as a public holiday at the start of a calendar year).

This will allow the bourse to facilitate the settlement of transactions that occurred prior the surprise holiday and provides more certainty to the capital markets as well as minimizing investment risks to the investors. 

Bursa Malaysia said it will only remain open on a surprise holiday subject to the Real-time Electronic Transfer of Funds and Securities System (RENTAS) being operational as the RENTAS system is used to facilitate the clearing and settlement of transactions.  

The exchange added that it will exercise prudence and due care on this matter and any decision made to operate on a surprise holiday will be communicated to both the market participants and the public in a timely manner via a media release, circulars or electronic notification. The amendments will come into effect on 10 January 2023.  

However, US bond yields fell sharply last week as the ISM non-manufacturing Purchasing Managers’ Index indicated that services industry activities fell and signals that inflation will be slowing down in the upcoming months ahead.

Nevertheless on the flip side, the job market and wages growth continue to remain robust. This likely means that the US Federal Reserve will continue to raise the Federal Funds Rate to its expected terminal rate of 5.10% and maintain it for the entirety of the year.

The 10-year US Treasury (UST) yields fell by a sharp 32 basis points last week to 3.56% from 3.88%. This brings the total yield gains over the past 19 weeks to 53 basis points.   

Meanwhile, the UST 2-year yields declined by a smaller margin of 16 basis points to 4.26% from last Friday’s close of 4.42%. This brings the yield curve inversion between the UST 2-year and 10-year notes into its 26th consecutive week. The yield spreads widened by 16 basis points to -70 basis points from -54 basis points in the week before. The long-term average of the yield spread for both UST is +0.92% or +92 basis points.   

The bond market in Malaysia also saw some tepid buying over the past week as the 10-year MGS bond yields fell by a modest 5 basis points to 4.02% last Friday. The latest result significantly widened the yield spreads between both countries’ 10-year bonds to 46 basis points from 19 basis points last week.

ECONOMICS

S&P Global Market Intelligence disclosed that Malaysia’s Manufacturing Purchasing Managers’ Index (PMI) for December 2022 fell marginally to 47.8 points from 47.9 points in November 2022 and was the fourth consecutive month of decline.

It added that muted customer demand contributed to declines in both output and order books. Business sentiments continue to remain subdued in December 2022 due to concerns that market conditions remain challenging in the coming months.

CURRENCY

The Ringgit ended virtually changed against the US Dollar at the end of the first week of 2023 at RM4.4010 / USD1.00.  The Ringgit held steady against the US Dollar despite profit taking in the equity markets.

However, the Ringgit gained ground against the other major currencies over the past week. The local currency rose against the British Pound at RM5.2796 / GBP1.00 (-2.1sen), the Euro at RM4.6568 / EUR1.00 (-4.6sen), the Japanese Yen at RM3.3100 / JPY100 (-2.8sen) and the Singapore Dollar at RM3.2836 / SGD1.00 (-0.2sen) respectively. 

MY OPINION

The local stock market is likely to trade sideways in the upcoming week taking cues from the key foreign markets such as the US and HK stock exchanges as the market’s direction is predominantly dictated by traders at the current juncture.

Over the medium term, there is still downside risks to the stock market as it usually does not bottom out before the start an economic slowdown or recession.  

Although the yield spreads between our local 10-year MGS yields and 10-year US Treasury Bills more than doubled last week, the near term outlook is negatively biased as the negative interest rate differential between the Overnight Policy Rate and the US Federal Funds Rate could potentially widen further.

This will put pressure on the bond prices to fall and yields to rise again as I doubt the bond market has fully priced in the effects of the upcoming potential rate hikes in the coming months.

In addition, I also doubt the market has factored in potential default risk for corporate bonds especially when the central banks across the world are likely to hold interest rates at their peak levels for at least 6-12 months.   

For the currency market, I am maintaining my view that the Ringgit will remain range bound between RM4.39 and RM4.45 against the US Dollar in the coming week albeit with a slight downside bias.

The market may start to adjust for another potential 50 basis points rate hike by the US Federal Reserve on 1 February 2023 as new claims for jobless benefits fell to a three-month low in December 2022.

Furthermore, non-farm payrolls rose by 223,000 last month, above economists’ expectations of a 200,000 jobs increase while unemployment rate fell to 3.5%, which is below the 3.7% level forecasted by economists. - DagangNews.com

Manokaran Mottain has been an economist with a number of financial institutions is now managing his own firm, Rising Success Consultancy Sdn Bhd