KLCI to trade below 1,420-point, unlikely any major developments due to GE15, says Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

The local equities market succumbed to profit taking once again after last week’s relief rally as the strong inflation numbers in the US for September 2022 at 8.2%, (which was above market expectations of 8.1%) put paid to any near term hopes of the US Federal Reserve pivoting back on their current interest rate stance.

The excitement from the Budget 2023 fizzled after the parliament dissolution. It has become academic now.

In addition, the early dissolution of the Parliament to hold the next general elections had also heightened political risk.

 As such, the benchmark KLCI Index ended the week at 1387.89 points (-18.11 points or -1.3%).   

Given the fact that the upcoming 15th General Elections (GE15) will be held within the next two months, it is unlikely there will be any major developments in the near term as all parties will be gearing up for an intense campaign period ahead of the polling date which has yet to be confirmed at the moment.

Therefore, I expect the KLCI Index to trade around the 1,360 – 1,420-point level in the near-term coming week in the absence of any market catalyst until the middle of November 2022 when the majority of the 3Q22 corporate earnings starts to be released.       

Meanwhile, bond yields across the duration curve spiked as inflation remains red hot in the US and strong language emanating from members of the US Federal Reserve on controlling inflation virtually ensures that another massive interest rate hike is in the offing at its November meeting.

Core inflation (which excludes food and energy) rose by 6.6%, which was also the highest rate of increase since August 1982.

Bond yields for the 10-year UST breached the 4% threshold last week as it rose by another 13 basis points to 4.02% from 3.89% last week and brings the total yield gains for the last seven weeks to 99 basis points.   

The UST 2-year yields continue to rocket higher by 18 basis points over the past week to 4.49% from last Friday’s close of 4.31%.

The yield curve inversion between the UST 2-year and 10-year notes heads into its 14th consecutive week. The yield spreads have widened back to -47 basis points from -42 basis points in the week before.

The long-term average of the yield spread for both UST is +0.92% or +92 basis points.   

It is unsurprising that selling resumed for the 10-year MGS bonds as yields rose by 13 basis points to 4.46% from 4.33% last Friday.

The yield spread for both countries’ 10-year bonds was unchanged at 44 basis points this week as the 10-year bond yields remained unchanged.

My forecast on the MGS market experiencing a technical rebound last week turned out to be correct as yields shot up once again as it becomes clear that the US Federal Reserve will continue to raise the Federal Funds Rate (FFR) aggressively in their next two meetings in November and December 2022 after the stubborn inflationary reading. In addition, the current yield spreads for both countries’ sovereign 10-year bonds are too narrow for comfort.

CURRENCY

From the lackluster performance of both the bond and equity markets over the past week, I believe that foreign fund managers continued with their portfolio rebalancing activities in anticipation of the US Federal Reserve raising the FFR by 75 basis points at the next US FOMC Meeting on 1-2 November 2022.

If the expected hike materializes, it will widen the interest rate spread between the FFR and Overnight Policy Rate to 100 basis points or 1% from the current 25 basis points. 

Therefore, it was not surprising that the Ringgit continues to set yet another 24-year low against the greenback and ended the week at RM4.7000 / USD1.00 (+5.1sen).

Going forward, I am raising my forecast of a new trading band for the Ringgit to between RM4.65 to RM4.75 in the near term.   

Meanwhile, the British Pound maintained its upward trajectory over the past week as Jeremy Hunt replaces Kwasi Kwarteng as the new Chancellor of Exchequer after Kwasi was appointed to the position just a scant six weeks ago.

Jeremy is a party veteran and widely viewed as a safe pair of hands as he had served as a cabinet minister under former Prime Ministers David Cameron and Theresa May.

This further lends credence that the UK government will be reversing course on most if not all of its proposed unfunded tax cuts outlined in its mini budget at the upcoming Medium Term Fiscal Plan.

The British Pound ended stronger note against the Ringgit for a second consecutive week at RM5.2562/GBP1.00 (+4.9sen)

It was also tough week for the Ringgit against the other major currencies as it only gained against the Japanese Yen at RM3.1560/JPY100 (-5.0sen).

It ended the week weaker against the Euro at RM4.5701/EUR1.00 (+1.1sen), and the Singapore Dollar at RM3.2961/SGD1.00 (+4.1sen).   – 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