Best to remain cautious in coming weeks - Manokaran

Weekly Market Analysis by Manokaran Mottain

MARKET

After a brief respite two weeks ago, the local stock market was on its back foot again last week with the benchmark KLCI Index ending the week at 1,425.79 points (-23.95 points or -1.65%). Nevertheless, the performance of the market was within my expectations it is bouncing between the 1,420 points (support level) and 1,485 points (resistance level).

The razor thin daily trading volumes and values over the past week (with daily trading value struggling to pass the RM1.5 billion level each day) highlights a severe lack of interest in the local stock market by local investors and traders at this moment. Hence, it is best to remain cautious as I expect this consolidating pattern to hold in the coming weeks.

Malaysia’s bond market surprisingly gained ground last week as yields for the Malaysian Government Securities (MGS) ended the week on a lower note. I believe local funds came in to support the bond market as the Ringgit fell notably against the US Dollar last week.  

Bond yields for both the 10-year US Treasuries (UST) and 10-year MGS yields ended the week at 3.08% and 4.14% respectively. The sell off in the US Treasuries over the past week was brought about by the stronger than expected jobs report and narrowed the yield spread by 27 basis points over the past five market days and brings the yield spread between both countries’ 10-year bonds to 106 basis points.

However, I would like to highlight that the two-year and ten-year yields for US Treasuries bonds inverted for the first time in three weeks and third time since late March 2022 – which is an indicator that a recession is likely in the coming one to two years’ time as the fixed income investors and traders are pricing in the risk of the recession in the shorter tenured bonds, which in turn pushed their yields above the longer tenured ones. The 2-year US Treasury bond yields on 8 July 2022 were 3.10% against 3.08% for the 10-year bonds.     

Once again, I would like to stress that the recent strength of the MGS may just be temporary especially if the inflationary figures in the US remain high. MGS can still come under further selling pressure in the months ahead as a result but yields for the 10-year MGS are not likely to breach 5.0% based on the current outlook.    

ECONOMY

Bank Negara Malaysia’s Monetary Policy Committee raised the Overnight Policy Rate (OPR) by 25 basis points to 2.25% last Wednesday (6 July 2022) as the adverse COVID-19 pressures on the local economy continue to recede. The ceiling and floor rates of the OPR corridor are correspondingly increased to 2.5% and 2.0%.

At the current OPR level, BNM disclosed that its monetary policy stance remains accommodate and supportive of economic growth and it will continue to assess evolving conditions and any adjustments to the monetary policy settings going forward would be done in a measured and gradual manner.

Supply chain experts expect the constraints that are being inflicted to the global supply chains to ease off towards the end of the year but will still be far off the pre-pandemic levels. Freight rates have declined from their peaks as port congestion eases and capacity gradually returns to the market.

China’s emergence from its COVID-19 lockdowns and international border re-openings will also help to ease the stress on supply chains.   

Malayan Banking Berhad said it will introduce and implement a new method to calculate interest, profit and dividend rates for the banking group’s existing and new current account, savings account and investment account products. Maybank said the new split-tier method will be using a formula which uses the account balance for each band x each interest / profit / dividend rate band x total number of days / total days of the year.   

CURRENCY

The Ringgit resumed its slide against the US Dollar last week despite Bank Negara Monetary Policy Committee raising the OPR by 25 basis points to 2.25%.

All eyes will be on the US inflation numbers next week as another strong set of numbers (>8.5% year-on-year) will likely trigger a further 75 basis points rate hike by the US Federal Reserve to the Federal Funds Rate at its next FOMC meeting later this month on 26-27 July 2022.

The local currency closed the week against the US Dollar at RM4.4250 / USD1.00 (+1.9 sen). As such, I am adjusting the expected trading band for the Ringgit next week lower to RM4.40 to RM4.45 as fund outflows may continue especially if the markets prices in a 75 basis points hike by the US Federal Reserve in the coming weeks as it will bring the FFR rate to parity with the OPR at 2.25%.    

It was a mixed week for the Ringgit against the other major currencies last week. The Ringgit rose sharply against the Euro at RM4.5082 / EUR1.00 (+8.8sen) and made smaller gains against the British Pound at RM5.3248 / GBP1.00 (+0.6sen) and the Japanese Yen at RM3.2480 / JPY100 (+0.8sen). However, the local currency lost ground against the Singapore Dollar at RM3.1663 / SGD1.00 (-0.9sen). – 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