KLCI Index to trade between 1,420-1,480 in coming weeks - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local equities market ended the week virtually unchanged last week after staging a sharp rally the previous week before. The benchmark KLCI Index ended the week just a shade higher at 1,447.31 points (-0.89 points) in lack luster trade with the daily trading values still remaining below RM2.0 billion a day.

I expect the KLCI Index to trade between 1,420–1,480 points in the coming week.

The local stock market has recovered positively from a low of 1,373.36 points on 13 October 2022 to its current level on the back more positive sentiments from the institutional investors on the political front especially after the Barisan Nasional has announced that Caretaker Prime Minister Datuk Seri Ismail Sabri will be their choice for Prime Minister should they win GE15.

This provides a crucial element of continuity and stability of the current government and its policies.      

Meanwhile, bond yields across the duration curve fell back on bargain hunting as bond investors start to rebuild positions in anticipation of the US Federal Reserve nearing a pivot point for their interest rate policy.

However, a solid 2.6% GDP growth posted by the US economy for 3Q2022 which was better than market expectations of 2.3% growth basically negated any potential reasons for the US Federal Reserve not to increase the Federal Funds Rate by 75 basis points at its Federal Open Market Committee (FOMC) meeting this coming week.

Nevertheless, the market players will be closely monitoring the tone of the US Federal Reserve on their outlook on inflation for 2023.

Bond yields for the 10-year UST fell sharply by 20 basis points to 4.01% from 4.21% last week and brings the total yield gains for the last nine weeks to 98 basis points.

Similarly, the UST 2-year yields also fell by 8 basis points over the past week to 4.41% from last Friday’s close of 4.49%. The yield curve inversion between the UST 2-year and 10-year notes heads into its 16th consecutive week.

The yield spreads have widened back to -40 basis points from just -28 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 performance in the US market also helped push the local government bonds yields lower last week with the yields for the 10-year MGS bonds dipping by a staggering 24 basis points to 4.33% from 4.57% last Friday.

However, the yield spread for both countries’ 10-year bonds continues to narrow further to just 32 basis points this week from 36 basis points.  

The outlook for the MGS market will greatly be determined by the outlook of the US interest rates in the near term due to the very narrow yield spreads between the UST and MGS.

While it is almost inevitable that the US Federal Reserve will continue to raise the Federal Funds Rate (FFR) at the November 2022 FOMC meeting, questions remain on whether the Federal Reserve will pause or slow down the interest rate upcycle for the December 2022 meeting and 2023.

ECONOMY

The Department of Statistics Malaysia (DSM) disclosed that the Producer Price Index (PPI) for September 2022 increased by 4.9% year-on-year (y-o-y) against 6.8% in August 2022. The gains came from the manufacturing (8.1%), water supply (4.3%) and the electricity & gas supply (1.2%). The mining index remained unchanged while the agriculture, forestry and fishing sector fell by 15.5%.

In a separate announcement, DSM also revealed that Malaysia’s Leading Index (LI) rose 4.5% y-o-y to 111.3 points in August 2022 versus 107.0 points in August 2021. The LI is a predictive tool used to forecast potential economic up and down turns between four to six months in advance.

The positive number for August was due to gains in the number of housing units approved, real imports of other basic precious and non-ferrous metals as well as the number of new companies registered.

While the signs are positive for the country to maintain its growth momentum (LI >100 points), the actual performance will be dependent on the initiatives taken to address cost of living issues and mitigate the effects of slowing global economic growth.

CURRENCY

The Ringgit ended the week marginally higher against the US Dollar at RM4.7200 / USD1.00 (-1.0sen) as fund flows stabilized ahead of the US FOMC meeting this week. Nevertheless, it is still hovering just off its all-time record low of RM4.73.

Going forward, I am maintaining the trading band for the Ringgit at between RM4.65 to RM4.75 in the near term.

Taking a leaf from United Kingdom, I believe the Ringgit will only regain ground against the major currencies once the political situation of the country has been cleared.

The British Pound continued its rally against the Ringgit for a fourth consecutive week at RM5.4762 / GBP1.00 (+12.0sen) as the appointment of Rishi Sunak as the new Prime Minister ended weeks of uncertainties over the government leadership and their budgetary plans for the country.

The Ringgit also ended markedly lower against the Euro at RM4.6966 / EUR1.00 (+5.6sen) after the European Central Bank raised its interest rate by 75 basis points to 1.50% and signaled that it is likely to continue raising rates well into 2023 in order to curb inflationary pressures in the Euro Zone.

The Ringgit ended the week marginally higher against the Japanese Yen at RM3.1940 / JPY100 (-1.5sen) and a just shade lower against the Singapore Dollar at RM3.3456 / SGD1.00 (+0.2sen). - DagangNews.com