Local stock market is likely to experience volatility in the near term - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE benchmark KLCI Index succumbed to profit taking upon weaker sentiments towards the second half of the week to end at 1,433.08 points (-20.47 points or -1.41%).

The absence of positive developments on the local front also contributed to the cautious sentiments. The average daily value traded fell 17.6% on a weekly basis to RM1.94 billion per day from RM2.36 billion per day in the week before and is below the past 100-day average daily trading value of RM2.05 billion per day.

In the bond market, US bond yields staged their biggest decline in recent years as the sudden collapse of the Silicon Valley Bank last Friday triggered a tidal wave of buying into safe haven assets like the US Treasuries. This came in spite of non-farm payrolls rising by 311,000 in February 2023 which was markedly above market expectations of 225,000 jobs.

Average hourly earnings also rose 4.6% on a year-on-year basis which is slightly below consensus of 4.8% but it is sufficient to continue powering demand pull inflation.    

Yields of US Treasuries declined sharply during the week due to a wave of risk-off transactions. The 10-year US Treasury (UST) yields ended the week at 3.70% from 3.96% in the previous week. This increased the total yield gains over the past 28 weeks to 66 basis points.   

The UST 2-year yields also sharply corrected (after briefly trading above 5% earlier in the week) by 27 basis points lower at 4.59% from last Friday’s close of 4.86%. The yield curve inversion between the UST 2-year and 10-year notes entered into its 35th consecutive week with yield spreads marginally narrowing by just one basis point to -89 points from -90 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 also correspondingly fell but not as much as the bonds in US as bond fund managers factor in relative sovereign ratings. The 10-year MGS bond yields fell by 7 basis points to 3.94% from 4.01% last Friday to widen the yield spreads between both countries’ 10-year bonds to 24 basis points from 5 basis points last week.  

ECONOMICS

The international reserves of Bank Negara Malaysia totalled US$114.3 billion (RM516.9 billion) as at 28 February 2023. The reserves position is sufficient to finance 5.0 months of imports of goods and services and is 1.0x of the total short-term external debt.

The Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) had decided to maintain the Overnight Policy Rate (OPR) at 2.75%. The current OPR level remains accommodative and supportive of economic growth. The MPC will continue to assess the impact of the cumulative OPR adjustments, given the lag effects of monetary policy on the economy.

Further normalisation to the degree of monetary policy accommodation would be informed by the evolving conditions and their implications to the domestic inflation and growth outlook. The MPC will continue to calibrate the monetary policy settings that balance the risks to domestic inflation and sustainable growth.

BNM expects both the headline and core inflation to moderate over the course of 2023 but at elevated levels amid lingering demand and cost factors. The extent of upward pressures to inflation will partly be contained by existing price controls and fuel subsidies as well as the remaining spare capacity in the economy.

The balance of risk to the inflation outlook is tilted to the upside and will be influenced by changes to domestic policy on subsidies and price controls, as well as global commodity price developments.

CURRENCY

The Ringgit extended its decline against the US Dollar over the past week due to portfolio managers rebalancing their portfolios to factor in a potential widening in the interest rate differential between the Overnight Policy Rate and the Federal Funds Rate.

In addition, the fallout from the collapse of Silicon Valley Bank – the 16th largest bank in the US, also triggered risk off sentiments among the investment community there. The Ringgit ended the week at RM4.5195 / USD1.00 (+4.40sen) against the US Dollar.  

The local currency also weakened against all of the other major currencies for the second consecutive week primarily due to fund managers rebalance their portfolios to adjust for the rising risk aversion position going forward.

The Ringgit closed lower against the Japanese Yen RM3.3410 / JPY100 (+6.00sen), the Singapore Dollar at RM3.3460 / SGD1.00 (+2.06sen), the Euro at RM4.8071 / EUR1.00 (+5.64sen) and the British Pound at RM5.4365 / GBP1.00 (+6.70sen).  

MY OPINION

The local stock market is likely to experience volatility in the near term as it will take leads from the regional markets given the lack of market catalysts locally. Due to heightened volatility, I expect the KLCI to trade in a wider range of between 1,420 points to 1,450 points for the coming week.  

The unexpected collapse of the 40-year old Silicon Valley Bank due to a bank run over a 48-hour period last Thursday and Friday sent a financial shockwave in the bond market and caused bond investors to switch into safer assets almost on an overnight basis.

The yields of the 10-year MGS yields also declined but only marginally as compared to the 10-year US Treasury Bills due to their higher sovereign rating. The widened yield spread provides some breathing room for the MGS but it may only be temporary as the wave of buying into US Treasures could end soon.

The next US Federal Reserve Federal Open Market Committee meeting on 21-22 March 2023 may see interest rates rising by another 50 basis points due to the strong inflation and jobs market. Hence there is a real case that MGS yields can re-test the 4.00% level again soon.   

I am adjusting my forecast for the Ringgit trading band between RM4.47 and RM4.57 against the US Dollar in the coming week as there may still be some volatility in store due to the re-allocation to safe haven assets by foreign institutional fund managers. - 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.