Markets still lacking moving catalysts to spur trading - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

MARKET

It was another lackluster week for the local stock market. The benchmark KLCI Index started the week on a somber note before slowly gaining ground throughout the week to end the week on a high of 1,496.53 points (+5.35 points or +0.3%).

Nevertheless, trading volume and value remains low (<RM2.0 billion per day) as is still quite discouraging for investors and traders alike as the intra-week movement for the KLCI Index (based on closing day prices) was just 0.55%, which is too low to make any meaningful trading gains unless one buys for long term holdings.

My view on the Malaysian equities market remains unchanged and it is likely to continue hovering around the 1,500 points level with a +/- 50 points variation in the next few weeks given the lack of market moving catalysts to spur increased trading among investors and traders.

The nearest potential catalyst for the market is the Budget 2023 which has been brought forward to 7 October 2022 from 28 October 2022.    

The bond yields for US Treasuries (UST) all rose for a third consecutive week as the fixed income market prepares for a 75 basis points hike by the US Federal Reserve. Economists and market players are currently predicting an 86% chance of a 75 basis points hike to the Federal Funds Rate by the US Federal Reserve at its next meeting in two weeks’ time.

As a result, bond yields for the 10-year UST jumped by a further 12 basis points on top of last week’s massive 16 basis points to 3.31% from 3.19% last week.  

The UST 2-year yields also surged higher by 17 basis points over the past week to 3.56% from 3.39%. The larger gains in the UST 2-year yields meant that the yield curve inversion between the UST 2-year and 10-year notes continues into its 9th consecutive week and widens to -25 basis points from -20 basis points in the week before. The long-term average of the yield spread for both UST is +0.92% or +92 basis points.   

Surprisingly, the 10-year MGS yields remained unchanged last week at 4.03% despite the surge in the US Treasuries. The jump in the UST yields brings the yield spreads between both countries’ 10-year bonds to narrow further by 12 basis points to just 72 basis points.

This means that the yield spread has closed by 21 basis points over the past two weeks and is likely to put downward pressure to the MGS yields in the next two weeks till the US Federal Open Market Committee meeting on 20-21 September 2022.  

ECONOMY

The Department of Statistics Malaysia disclosed that the overall unemployment rate in Malaysia fell by 1.1% on a year-on-year (y-o-y) basis and 0.1% on a month-on-month (m-o-m) basis to 3.7% in July 2022. The country’s labour force rose by 3.3% y-o-y and 0.2% m-o-m to 16.6 million.

The number of employed persons rose by 4.5% y-o-y and 0.3% m-o-m to 15.98 million while the number of unemployed persons reduced by 20% y-o-y and 1.6% m-o-m to 620,700.

Bank Negara Malaysia (BNM) increased the benchmark Overnight Policy Rate (OPR) by 25 basis points to 2.50%. This brings the ceiling and floor rates of the OPR to 2.75% and 2.25% respectively.

BNM considers the current monetary policy stance to be still accommodative and supportive of growth. Headline inflation is expected to peak in 3Q2022 before moderating going forward.      

Malaysian Palm Oil Association said the oil palm industry is currently facing its worst ever worker shortage since 1917 when the commercialization of the palm oil industry started. This will likely result in an estimated opportunity loss amounting to RM20 billion to the industry this year due to significant crop losses of between 15% to 25%.

MPOA forecasted that the total CPO production this year will amount to around 18 million tons if the pace of foreign workers returning to harvest mature fruits continues at the present snail pace. The current shortage of plantation workers in the local palm oil industry is about 120,000 workers.  

CURRENCY

Unsurprisingly, the Ringgit continued to lose ground against the US Dollar and other major currencies over the past week. The gains by the US Dollar was primarily driven by increasing expectations among market participants that the US Federal Reserve will hike the Federal Funds Rate by 75 basis points at the upcoming meeting on 20-21 September 2022. The local currency ended the week at RM4.4960 / USD1.00 (-1.0sen)

The Ringgit gave back some ground against all the other major currencies except the Japanese Yen last week after chalking up gains for the past three weeks. The Ringgit ended the week lower against the Euro at RM4.5157 / EUR1.00 (-5.2sen), the British Pound at RM5.2123 / GBP1.00 (-5.3sen) and the Singapore Dollar at RM3.2141/ SGD1.00 (-1.7sen).

The Ringgit continued to spike against the Japanese Yen at RM3.1500 / JPY100 (+4.3sen) as a result of the latest interest rate hike by BNM to the OPR.

For the week ahead, I am adjusting my forecast on the Ringgit / USD trading band to between RM4.47 to RM4.52. For the other major currencies, I am maintaining my view that they will continue consolidating for the next few weeks.  – 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