A challenging week as stock markets digesting the state election results - Manokaran  

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local stock market regained ground last week as foreign investors returned and were consistent net buyers throughout the week. As such, the benchmark KLCI Index recovered back all of its losses in the previous week and closed at 1,457.16 points (+11.95 points or +0.82%).

However, trading activity declined marginally to RM1.79 billion per day from RM1.84 billion per day last week. The overall trading value for the week remains in line with the past 100-day average daily trading value of RM1.84 billion per day.

In the bond market, bond yields rose for the third consecutive week as investors are adjusting their expectations that the US Federal Reserve will continue to hold the Federal Funds Rate at 5.25% - 5.50% at their next Federal Open Market Committee meeting on 19-20 September 2023.

US Consumer Price Index rose 3.2% year-on-year (y-o-y) and 0.2% on a month-on-month (m-o-m) basis in July 2023 which was slightly below market expectations while the core inflation (which excludes food and energy prices) rose 4.7% y-o-y and 0.2% m-o-m respectively.

The core inflation numbers were also the lowest since October 2021. While the CPI has fell from its 40-year highs of 9.0% in June 2022, it is still relatively far from the 2.0% target rate set by the US Federal Reserve.  Meanwhile, the producer price index rose 0.8% y-o-y and 0.3% m-o-m in July 2023 which was slightly above the economists’ forecast of 0.2%. Prices excluding food, energy and trade services rose 2.7% y-o-y.   

Yields for the 10-year US Treasury (UST) advanced by another 12 basis points to 4.16% from 4.04% while the UST 2-year yields also similarly rebounded by 12 basis points to 4.89% from last Friday’s close of 4.77%. This extends the yield curve inversion between the UST 2-year and 10-year notes to 56 weeks with yield spreads remaining unchanged at -73 basis points.  

The 10-year MGS bond yields fell by three (3) basis points to 3.84% from 3.87% last Friday. The negative yield spreads between both countries’ 10-year bonds continue to widen further to -32 basis points from -21 basis points last week.    

ECONOMICS

The International Energy Agency (IEA) has increased its global oil demand growth for 2023 by 2.2 million barrels per day to 102.2 million barrels per day as world oil demand rose to a record of 103 million barrels per day in June and August 2023 and is set to rise further.

IEA said world oil demand continues to be supported by strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity with China accounting for around 70% of the demand growth in 2023.

A sharp reduction in production by Saudi Arabia last month helped to sustain prices as output from the 23-nation Opec+ Alliance fell 1.2 million barrels per day (mb/d) to 50.7 mb/d. However, production volumes by non-Opec+ members rose to 50.2 mb/d.

The Department of Statistics Malaysia (DOSM) disclosed that Malaysia’s construction sector rose 8.1% y-o-y in the value of work done in 2Q 2023 to RM32.4 billion on the back of a 10.4% growth in civil engineering. The sub-sector of special trade activities recorded a 9.8% growth while the non-residential buildings sub-sector grew by 5.7%.

A total of RM12.1 billion or 37.4% of the construction value done came from the civil engineering segment; mainly through the construction of roads and railway activity while the value of work done for non-residential buildings and residential buildings was RM9.9 billion (30.7%) and RM7.3 billion (22.7%) respectively.

In a separately development, the DOSM said the services sector revenue registered a 6.9% y-o-y growth in 2Q 2023 to RM568.3 billion, driven by the wholesale and retail trade, food and beverages, and accommodation segment, which increased 5.9% to RM433.5 billion. This is followed by the information, communication, transportation & storage and the professional, real estate, administrative & support service segments, which grew by 10.1% and 9.9% to RM79.5 billion and RM35.8 billion respectively.

The e-Commerce income recorded RM280.5 billion which is 2.5% higher on a y-o-y basis in 2Q2023 but was -3.8% lower on a m-o-m basis. The number of persons engaged in the services sector was 4.4 million persons, which translates to an increase of 73,400 persons or +1.7% on a y-o-y basis.

Salaries and wages paid also registered an increase of RM1.2 billion, or 3.9% y-o-y which mostly came from the wholesale and retail trade sub-sector, which rose 2.0% to RM14.0 billion followed by the transportation and storage sub-sector, which increased 6.3% to RM2.9 billion.

CURRENCY

The Ringgit gave back some of its gains against most of the major currencies over the past week with the exception of the Japanese Yen and the Singapore Dollar which remained unchanged at RM3.20 /JPY100 and RM3.3900 / SGD1.00 respectively.

The local currency ended the week lower against the Euro at RM5.0200 / EUR1.00 (+3.70sen), the US Dollar at RM4.5840 / USD1.00 (+3.30sen) and the British Pound at RM5.8220 / GBP1.00 (+3.80sen).

MY OPINION

The KLCI Index performed better than expected last week as foreign investors resumed their buying spree ahead of state elections in Selangor, Negeri Sembilan, Pulau Pinang, Kedah, Kelantan and Terengganu last Saturday.

However, the coming week will be challenging as the local stock market digests the state election results which saw the incumbent unity government (Pakatan Harapan & Barisan Nasional) maintaining its hold on Selangor, Negeri Sembilan and Pulau Pinang while the opposition coalition (Perikatan Nasional) strengthened its grip on Kedah, Kelantan and Terengganu.

While the overall results were within expectations of the market, the opposition coalition performed slightly better than expected as it managed to make some in-roads and gain more seats in all three states held by the unity government (Selangor, Pulau Pinang and Negeri Sembilan).

Nevertheless, I expect the market to consolidate between 1,450-1,475 points in the coming week on continued buying support.    

The performance of the MGS 10-year bonds was also surprisingly strong given the widening interest rate differential against the UST 10-year yields which has now risen to 32 basis points. Nevertheless, I am maintaining my expectations for yields to rise nearer to the 4.00% level in the short to medium term given the yield gap and the fact that the US Federal Reserve is almost certain to only cut interest rates in 2024 rather than the end of this year.

The Ringgit performed according to my expectations last week and will likely to remain within a relatively tight range of between RM4.50 – RM4.65 in the coming week. I don’t expect major volatility to the local currency as there aren’t any major developments in the coming week.  - DagangNews.com