Little impact on the recalibration of the electricity tariffs for 1st half of 2023 - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE benchmark KLCI Index ended the week marginally higher 1,478.54 points (+1.35 points or +0.09%) in the absence of any market catalyst.

In the coming week, the market will be focused on the first session of the 15th Parliament session on 19 December 2022.

There was little impact on the market on the recalibration of the electricity tariffs for the first half of 2023 given the fact that only the medium and high voltage electricity users (large & multinational companies) only be the surcharge rate of 20 sen/KWj.

The federal government has allocated RM10.76 billion in subsidies to ensure that domestic consumers and SME will not be affected.        

The US Federal Open Market Committee (FOMC) raised the Federal Funds Rate by 50 basis points to their highest level in 15 years between 4.25% - 4.50%.

The Federal Reserve has also indicated it expect to keep interest rates at the projected terminal rate range of around 5.00% - 5.25% throughout 2023 with no rate cuts until 2024 to allow the impact of the monetary policy tightening take effect on inflationary pressures.

The current expectations by economist is for the Federal Reserve to cut rates by 100 basis points in both 2024 and 2025 respectively before eventually settling to the long-term neutral level of 2.50%.    

However, US bond yields fell back to its two-week low despite the latest interest rate hike by the US Federal Reserve as investors switched into bonds as they expect more volatility in the equity space in the face of a potential economic recession in 2023.

The 10-year UST yields fell by 10 basis points over the past week to 3.49% from 3.59%. This brings the total yield gains over the past 16 weeks to just 46 basis points.

The UST 2-year yields fell by 16 basis points to 4.18% from last Friday’s close of 4.34%. This brings the yield curve inversion between the UST 2-year and 10-year notes into its 23rd consecutive week.

The yield spreads narrowed for the second consecutive week to -69 basis points from -75 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 flattening yields in the US market is reflected in the local bond market as investors started to add holdings over the past two weeks. MGS bonds rose fell marginally by six (6) basis points to 4.00% from 4.06% last Friday.

The latest result widened the yield spreads between both countries’ 10-year bonds to 51 basis points from 47 basis points last week.

ECONOMICS

Malaysia’s new vehicle sales rose 7.0% year-on-year to 64,404 units in November 2022 from 61,002 units in the previous month. This brings the total vehicle sales for the first 11 months of 2022 to 642,306 units.

The Malaysian Automotive Association attributed the hike in sales to auto companies delivering a backlog of orders for bookings made before 30 June 2022 (which was the expiry date for passenger vehicles sales tax exemption).

Meanwhile, vehicle production in November 2022 grew by 13% y-o-y to 65,669 units from 58,079 units with the number of vehicles produced on a year-to-date (January – November) basis for 2022 rising to 633,421 units from 427, 485 units last year.   

CURRENCY

The Ringgit weakened marginally against the US Dollar for the second consecutive week as sentiments of currency traders and investors turned cautious ahead of the FOMC’s decision last week. As a result, the local currency ended the week lower at RM4.4225 / USD1.00 (-2.1sen). 

The local currency generally weakened slightly against most of the other major currencies with the exception of the British Pound, which ended virtually flat at RM5.3961 / GBP1.00 (+0.2sen).

The rest of the currencies strengthened against the Ringgit led by the Euro at RM4.7049 / EUR1.00 (-6.8sen) which rallied after the European Central Bank raised interest rates by 50 basis points for all three of its key rates – namely the main refinancing operations (2.50%), marginal lending facility (2.75%) and deposit facility (2.00%).

Meanwhile, the Japanese Yen and the Singapore Dollar rose slightly against the Ringgit at RM3.220 / JPY100 (-0.1sen) at RM3.2585 / SGD1.00 (-0.7sen) respectively.

MY OPINION

I expect the benchmark KLCI to retreat slightly in the coming week given the fact that the gains last week came from window dressing activities last Friday afternoon.

Nevertheless, I am maintaining my view that the KLCI will re-test the 1,500-point level towards the end of the month as there could be continuous window dressing activities given the weak market conditions this year.

After 1,500 points, the next technical resistance for the KLCI is at 1,520 points. It will need a strong market catalyst to breach that level. The next near-term catalyst for the market would be the revised Budget 2023, which is very likely to be tabled in Parliament before the end of 2022.   

In the bond market, although the MGS yields have fallen recently but I believe it will rebound later as we still expect Bank Negara to raise the Overnight Policy Rate next year by at least another 25 to 50 basis points.

In addition, the yield spread between the MGS and the UST remains very narrow at 51 basis points, which may see some bond managers positioning into the UST for better yield pickup. 

For the currency market, I foresee the Ringgit to remain range bound between RM4.40 and RM4.45 against the US Dollar as it has already adjusted for the latest interest rate hike.

I would also expect the Ringgit to face some weakness against the Euro and Pound Sterling as the EU and UK central banks are likely to continue raising interest rates in the near future to bring inflation under control.

The ECB projects inflation in the Eurozone to reach 8.4% in 2022 before gradually declining to 6.3%, 3.4% and 2.3% in 2023 to 2025. – 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