Stocks market likely to continue its rebound as fears of global financial crisis subsided - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

The benchmark KLCI Index experienced a surge in volatility as the banking crisis in US spilled over to the local bourse initially affecting investor sentiments before recovering strongly in the second half of the week to end at 1,411.73 points (-21.35 points or -1.49%).

Concerns over a potential global banking crisis abated following news that a consortium comprising of the top banks in the US led by Bank of America, Wells Fargo, Citigroup and JPMorgan Chase contributed US$30 billion (RM134.5 billion) in deposits to help the troubled First Republic Bank.

This move also helped to stem and contain the fallout from the collapse of Silicon Valley Bank and Signature Bank in the previous week. Meanwhile Credit Suisse will be borrowing up to 50 billion Swiss francs (RM242.9 billion) from the Swiss National Bank to help strengthened its liquidity position.  

The average daily value traded skyrocketed by 37% on a weekly basis to RM2.66 billion per day from RM1.94 billion per day in the week before thanks to last Friday’s massive RM4.09 billion trading value. Last week’s trading value was 27% above the past 100-day average daily trading value of RM2.08 billion per day.

In the bond market, US bond yields continued to fall across the entire yield curve as institutional fund managers continued to switch out of banking stocks and moved into US Treasuries especially into the shorter tenured ones.

Focus would now be on the upcoming Federal Open Market Committee (FOMC) meeting next week with the market now focusing on a modest 25 basis points interest rate hike instead of 50 basis points earlier.

The case for a modest hike is also supported by a marginal 0.1% month-month decline in February 2023’s producer price index against a consensus forecast of a 0.3% gain. On an annualized basis, the index increased by 4.6%.

The 10-year US Treasury (UST) yields ended the week 26 basis points lower at 3.44% from 3.70% in the previous week. This increased the total yield gains over the past 29 weeks to just 40 basis points.   

The UST 2-year yields posted their largest decline since October 1987, dropping by a massive 74 basis points lower to 3.85% from last Friday’s close of 4.59%.

However, the yield curve inversion between the UST 2-year and 10-year notes continues into the 36th consecutive week even though the yield spreads have narrowed sharply by -41 points from -89 basis points last week. The long-term average of the yield spread for both UST is +0.92% or +92 basis points.  

MGS bond yields rose as bond fund managers start to factor in relative sovereign risk ratings. The 10-year MGS bond yields rose by 5 basis points to 3.99% from 3.94% last Friday to widen the yield spreads between both countries’ 10-year bonds to 55 basis points from 24 basis points last week.  

CURRENCY

The Ringgit managed to claw back some of its losses against the US Dollar in recent weeks when it closed out the week slightly higher at RM4.4830/ USD1.00 (-3.65sen). This came on the back of the turmoil in the US banking sector, which caused money managers opting to adopt a risk-off stance when it comes to the US markets until they get more clarity on the situation.        

Nevertheless, the case for a strong US Dollar continues especially when the US Federal Reserve is set to continue raising rates and all eyes will be on the FOMC meeting and their outlook on the economy and inflation next week.  

The performance of the local currency against all of the other major currencies was mixed over the past week. The Ringgit closed lower against the Japanese Yen RM3.3910/ JPY100 (+5.00sen) and the British Pound at RM5.4595/ GBP1.00 (+2.30sen) but gained against the Euro at RM4.7835/ EUR1.00 (-2.36sen) and the Singapore Dollar at RM3.3456/ SGD1.00 (-0.04sen).

MY OPINION

The local stock market is likely to continue its rebound in the coming week as fears of a global financial crisis had been reduced through the rescue packages for both Credit Suisse and First Republic Bank. As such, I expect the KLCI to return to its previous trading band at between 1,430 points to 1,450 points for the coming week led by the banking sector.    

The widening positive yield spread between the MGS and UST will help to taper the volatility of the MGS yields going forward. While it is almost certain that the US Federal Reserve will increase interest rates at its next FOMC meeting on 21-22 March 2023, I believe that the yield spread has already more or less factored in a 25 basis points hike.

Hence MGS yields is likely to hover between 3.90% - 4.00% in the near term unless the FOMC surprises the market by a 50 basis points hike or the current turmoil in the US and European banking sector intensifies with more banks requiring emergency funding to avert insolvency and bankruptcy.   

I am fine-tuning my forecast for the Ringgit trading band against the US Dollar as last week’s rebound moved the Ringgit to the upper end of my forecast. I expect the volatility for the Ringgit to slow in the coming week and the likely trading range is between RM4.44 and RM4.53.  - 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.