KLCI will re-test 1,500-point level this week - Manokaran Mottain

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

AS expected, the benchmark KLCI Index ended last week marginally lower at 1,474.68 points (-3.86 points or -0.26%) ahead of the Christmas weekend.

Daily trading value fell by about 16% against the previous week at around RM1.6 billion per day. The KLCI Index weekly volatility (based on day end closing prices) was around 1.0% over the past week.

A lot of the focus were centered around the gloves and healthcare sector given the skyrocketing number of COVID-19 cases in China and India.

Apart from this, there was little interest in the equities market for now given the lack of material developments & catalysts.

However, US bond yields resumed its rise as investors started taking profit from the recent rally in bond prices as more signals indicate that the US Federal Reserve is on track to raise the Federal Funds Rate to its terminal rate of 5.10% and hold it there longer than expected.

The 3Q2022 GDP for the US came in at 3.2% which was higher than the market expectation of 2.9%. This followed a -0.6% contraction in 2Q2022.

In addition, bond markets across the world also succumbed to profit taking after the Bank of Japan tweaked its yield curve control in an effort to cushion the effects of its protracted loose monetary policy stance.

The 10-year UST yields swung higher by 26 basis points over the past week to 3.75% from 3.49%. This brings the total yield gains over the past 17 weeks to 72 basis points.

The UST 2-year yields rose by a smaller margin of 14 basis points to 4.32% from last Friday’s close of 4.18%. This brings the yield curve inversion between the UST 2-year and 10-year notes into its 24th consecutive week.

The yield spreads narrowed for the third consecutive week to -57 basis points from -69 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 bond market in Malaysia was also not spared by the global selloff as the 10-year MGS bond yields rose by seven (7) basis points to 4.07% from 4.00% last Friday.

The latest result significantly narrowed the yield spreads between both countries’ 10-year bonds to 32 basis points from 51 basis points last week.

ECONOMICS

Malaysia’s job vacancies that were advertised online fell by 5.9% year-on-year (y-o-y) to 190,170 in 3Q2022 as compared to 202,102 posted in 2Q2022. Consequently, job openings also recorded a 1.2% y-oy decline.

All states in Malaysia posted a decline in vacancies except Labuan. The professional category made up the largest component of the total job vacancies at 46.1% or 87,587 vacancies followed by the technicians and associate professionals at 18.1% and managers at 12.8%.

Kuala Lumpur recorded the highest number of vacancies at 79,183 followed by Selangor (27,424), Johor 14,815) and Penang (6,340).

Taiwan’s export orders in November 2022 fell by 23% which was much worse than the 13% drop forecasted by economists. This was the biggest decline since March 2009. Taiwan is one of the largest supplier of electronics and semiconductors products globally and a sharp drop off in orders is an early indication of the weakening demand across the world.

The Ministry of International Trade and Industry (MITI) disclosed that Malaysia’s exports in November 2022 rose by 15.6% y-o-y to RM130.24 billion while imports and trade surplus also correspondingly rose by 15.6% each to RM107.93 billion and RM22.3 billion respectively.

The increase in exports were attributed to the electrical and electronic products, liquefied natural gas and petroleum products. Exports to ASEAN countries, United States, European Union and Japan recorded double digit growth during the month. 

CURRENCY

The Ringgit ended virtually unchanged against the US Dollar last week in the absence of any major developments both for the Ringgit and the US Dollar as the market has already factored in the portfolio adjustments for the latest round of interest rate hikes by the FOMC. The local currency ended the week at RM4.4220 / USD1.00.   

The performance of the Ringgit was mixed over the past week with the local currency gaining against the British Pound and the Euro as profit taking kicked in following the European Central Bank’s decision to raise interest rates by 50 basis points earlier in the month. The Ringgit ended the week at RM5.3308 / GBP1.00 (-6.5sen) and at RM4.6971 / EUR1.00 (-0.8sen) respectively.  

Meanwhile, the Ringgit lost ground against the Japanese Yen and the Singapore Dollar which rebounded after two weeks of losses at RM3.3240 / JPY100 (+10.4sen) and RM3.2713 / SGD1.00 (+1.3sen) respectively.

The Yen spiked sharply over the past week as the Bank of Japan adjusted its yield curve control policy to allow the 10-year Japanese Government bonds widen its target range by +/- 50 basis points to either side of its 0% target from 25 basis points previously.

The Bank of Japan said the move was intended to improve market functioning and encourage a smoother formation of the entire yield curve while maintaining accommodative financial conditions. The yield curve control mechanism was introduced in September 2016 to help stimulate inflation towards its 2% target.

MY OPINION

I expect the benchmark KLCI to end the coming week higher on the back of window dressing activities to close off the year. Hence, I am maintaining my view that the KLCI will re-test the 1,500-point level by the end of the week.

After the immediate resistance at 1,500 points, the next technical resistance for the KLCI is at 1,520 points. The next catalyst for the market would be the revised Budget 2023, which is only due to be tabled in Parliament in February 2023. Until then, the market will generally be flattish.    

The local 10-year MGS yields only rose slightly as compared to its US counterpart and their yield spreads have fallen to one of its lowest level at 32 basis points currently. Therefore I expect our bond markets to be under selling pressure in the near term as the US bonds offer better yield pick up prospects at this point in time.

Nevertheless, the bond market may find some relief at the next Monetary Policy Committee meeting on 18 & 19 January 2023 whereby the market consensus expects Bank Negara to raise the Overnight Policy Rate by another 25 basis points.   

For the currency market, I foresee the Ringgit to remain range bound between RM4.40 and RM4.45 against the US Dollar in the coming week as I do not expect any major developments in the forex space.

This will also extend to the other major currencies in the coming week as well. I consider the move by the Bank of Japan to adjust its yield curve controls as a one-off measure to support the Yen and it is not likely to happen again any time soon. - 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