Concerns the equity market will be heading into tough times - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local equities market continued its range bound trading last week and the absence of positive news flow caused the market to drift lower as traders are usually reluctant to take large trading positions during holiday shortened weeks.

The benchmark KLCI Index ended the week lower at 1,415.95 points (-6.16 points or -0.43%) while the average daily value fell by 11.5% on a weekly basis to RM1.54 billion per day from RM1.74 billion per day last week.

Last week’s trading value was 25% below the past 100-day average daily trading value of RM2.05 billion per day.

In the bond market, US bond yields benefitted from a continued risk off move by investors in anticipation of an economic recession in the 2nd half of the year. Fears were sparked when the US 1Q2023 GDP grew by just 1.1% which was significantly below market expectations of a 2.0% growth.

The slowdown in growth came from a decline in private inventory investment and a slowdown in non-residential fixed investment.

The continuing interest rate hike cycle to contain inflation and the resultant credit crunch is expected to put further pressure on economic growth but this will be cushioned by resilient consumer demand and consumption.     

The 10-year US Treasury (UST) yields fell by 13 basis points to 3.44% from 3.57% in the previous week and further reduced the total yield gains over the past 52 weeks to just 54 basis points.   

The UST 2-year yields similarly fell by 14 basis points to 4.04% from last Friday’s close of 4.18%. This continues the yield curve inversion between the UST 2-year and 10-year notes into its 42nd consecutive week with the yield spreads marginally narrowing to -60 basis points from -61 basis points last week.  

Conversely, the 10-year MGS bond yields also fell by nine (9) basis points to 3.73% from 3.82% last Friday causing the yield spreads between both countries’ 10-year bonds to widen slightly to 29 basis points from 25 basis points last week.  

ECONOMICS

Malaysia’s total trade for March 2023 amounted to RM232.7 billion. The number was 1.6% lower on a year-on-year (y-o-y) basis as compared to March 2022 due to a decline in both exports (-1.4% y-o-y) and imports (-1.8% y-o-y).

Pulau Pinang (31.9%), Johor (19.9%), Selangor (18.4%), Sarawak (8.2%) and Kuala Lumpur (3.5%) remained the key exporting states, contributing 81.9% of the country’s total exports in March 2023.

The top five (5) states for imports were Selangor (25.6%), Johor (23.4%), Pulau Pinang (22.2%), Kuala Lumpur (7.5%) and Kedah (5.2%).

CURRENCY

The Ringgit weakened against most of the major currencies over the past week with the exception of the Japanese Yen when it closed higher at RM3.2700 / JPY100 (-4.00sen).

It lost ground against the US Dollar at RM4.4580 / USD1.00 (+2.25sen), the Singapore Dollar at RM3.3419 / SGD1.00 (+1.84sen), the British Pound at RM5.6030 / GBP1.00 (+10.03sen) and the Euro at RM4.9131 / EUR1.00 (+5.96sen).

The weakness of the Ringgit can be attributed to the fact that the market is expecting Bank Negara to maintain the Overnight Policy Rate at 2.75% in the upcoming Monetary Policy Committee Meeting on 2-3 May 2023 while the US Federal Reserve and the European Central Bank are likely to hike their respective benchmark interest rates further upon the conclusion of their monetary policy meetings next week as well.

MY OPINION

The local equities market was weaker than expected as it slid back to the 1,415 points support level on low trading volume.  The coming week will also be another short one as the country celebrates Wesak Day on 4 May 2023.

Therefore, trading conditions are likely to remain unchanged from the week before with the market direction being driven by news flow with the KLCI Index is expected to trade between 1,400 – 1,430 points in the coming week.

There are concerns that the equity markets will be heading into tough times as the year to date gains of the S&P500 index was mostly attributed to just seven (7) key stocks – Apple, Microsoft, Alphabet, Amazon, Tesla, Meta Platforms and Nvidia, indicating that the index gains are not broad based and confined to a very narrow segment of stocks.

The US bond market benefitted from a risk off buying spree last week but it is likely to be tempered if the US Federal Reserve decides to raise the Federal Funds Rate by another 25 basis points next week.

Hence, I expect the bond yields to remain around the current levels (+/- 10 basis points) in the coming week.

This will be important week for the currency market with the monetary policy meetings of the central banks of US, Europe and Malaysia being held from 2-4 May 2023. 

As such there will be significant important news flow on the currency market.  Going forward, I expect the Ringgit to trade between RM4.40-RM4.50.

The Ringgit may weaken slightly further from the current level but I doubt it will cross RM4.50 level against the US Dollar and RM5.00 level against the Euro as the foreign exchange market has already more or less factored in the potential interest rate differential between the Ringgit, the Euro and the US Dollar.  - 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