Market expected to be range bound pending the re-tabling of Budget 2023 - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE benchmark KLCI Index barely managed to reverse two consecutive weeks of losses to close the week marginally at 1,476.90 points (+2.31 points or +0.15%) as it faced continuous profit taking within the large cap space especially from the foreign investors.

In addition, we also see trading activities among the mid and small cap space tapering off as the average daily value traded fell by almost 20% (especially in the retail segment) to RM2.07 billion per day from RM2.56 billion per day in the week before. This is just slightly above its past 100-day average daily trading value of RM1.98 billion.

In the bond market, US bond yields continued their march higher after the Consumer Price Index (CPI) rose 0.5% in January 2023 which translates to an annual gain of 6.4%. The number came in higher than the market forecast of 0.4% and 6.2% respectively. The core CPI (which excludes food and energy prices) rose 0.4% on a monthly basis and 5.6% on a year-on-year basis. Both numbers were also higher than market estimates. Meanwhile, the producer price index for January 2023 increase further by 0.7% after having declined 0.5% in December 2022. Economists had been expecting a 0.4% increase. 

The 10-year US Treasury (UST) yields came back to their highest levels since November 2022 when yields rose by another 8 basis points last week to 3.82% from 3.74%. This increased the total yield gains over the past 25 weeks to 78 basis points.   

The UST 2-year yields also similarly rose by 10 basis points to 4.62% from last Friday’s close of 4.52%. The yield curve inversion between the UST 2-year and 10-year notes entered into its 32nd consecutive week with yield spreads widening by just 2 basis point to -80 points from -78 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 finally reacted and started rising over the past week as foreign institutional investors sold their holdings following the rise in the yields of US Treasuries. The 10-year MGS bond yields jumped by 14 basis points to 3.92% last Friday. The latest result only marginally widened the yield spreads between both countries’ 10-year bonds to 10 basis points from 4 basis points last week.  

ECONOMICS

PropertyGuru Malaysia’s Sale Demand Index fell by 14.8% in 4Q2022 as the sector is still being plagued by affordability issues. PropertyGuru added that its Malaysian Property Market Report for 1Q2023 indicated that rising inflation and higher borrowing costs had impacted the budgets of potential buyers and simultaneously forced sellers to raise their prices to cover the higher cost of property investments and ownership. It noted an uptrend in its Malaysia’s Sale Price Index by 1.5% quarter-on-quarter (q-o-q) following the steady increase of the Overnight Policy Rate (OPR) to 2.75% while the asking prices for properties listed on its online website rose by 5.0% y-o-y.

Country Manager for Malaysia, Sheldon Fernandez, said although the property market’s activities were deemed to be healthy in 2022, the report’s findings indicated that Malaysians are now much more careful when buying big ticket items like property. He added that as a result, potential homebuyers gravitated towards the rental market as their Rental Demand Index rose by 32.9% in 2022 while the supply of rental listings on PropertyGuru’s website increased by 19.6%.

CURRENCY

The Ringgit extended its decline against the US Dollar for the third week in a row as fund managers continue to buy into the US Dollar in anticipation of another 50 basis points rate hike by the US Federal Reserve at its next two meetings as inflationary pressures fell lower than expected in January 2023 and the labor market remains relatively strong despite repeated rate hikes. It ended the week at RM4.4295 / USD1.00 (+9.8sen).    

The Ringgit continued to lose ground against most of the other major currencies last week with the exception of the Japanese Yen which depreciated against the local currency to close at RM3.2790 / JPY100 (-2.4sen). The Ringgit ended the week lower against the Singapore Dollar at RM3.3051 / SGD1.00 (+4.5sen), the Euro at RM4.7144 / EUR1.00 (+8.1sen) and the British Pound at RM5.2861 / GBP1.00 (+4.2sen).  

MY OPINION

The overall market especially the KLCI Index largely remained on its back foot in the face of continuous selling in the large caps by foreign fund managers who switched back to the US Dollar in light of the possibility of further rate hikes in the coming months. We also noticed that the trading activity in the retail segment has also slowed down and market activity is slowing converging back to its 100-day moving average.

I expect the market to be range bound in the coming week pending the re-tabling of Budget 2023 this Friday as the market will be looking for key policy drivers for the economy this year.

In the meantime, the release of corporate earnings for 4Q2022 continues but so far, the early results have largely been in line with the consensus in the street with companies giving a more cautious outlook for 2023.

The yield spreads between our local 10-year MGS yields and 10-year US Treasury Bills continues to be razor thin at just 10 basis points. This makes the MGS yields vulnerable to another sell off as it is becoming more likely that the US Federal Reserve will continue to raise interest rates by another 50 basis points to 5.0% by the middle of the year given the strength of inflationary forces. Hence I am maintaining my view that the local MGS yields are likely to rise to the 4.00% level in the coming weeks as they are just a shade above the US Treasury Bills which carry a much higher sovereign rating.

In the currency market, the weakness of the Ringgit was sharper than expected as the selloff continues into its third straight week. The Ringgit has declined by 4.5% since the start of February 2023. Nevertheless, I believe that the bulk of the selling is over as the recent fall has already reflected more or less the expected rate 50 basis point rate hikes to Federal Funds Rate in the coming months.

Going forward, I foresee that the volatility in the Ringgit should slow down and adjust my forecast for the Ringgit trading band between RM4.38 and RM4.48 against the US Dollar in the coming week. - 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