Market to gradually heading towards 1,450 points on the back of further positive news flow - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local equities market managed to eke out gains for a second consecutive week in range bound trading with the  benchmark KLCI Index ending the week at 1,435.13 points (+8.09 points or +0.57%).

However, the average daily value rebounded slightly by 15.5% on a weekly basis to RM1.78 billion per day from RM1.54 billion per day last week. Last week’s trading value remains 15% below the past 100-day average daily trading value of RM2.10 billion per day.

In the bond market, US bond yields ended higher despite a number of better than expected economic reports, which showed signs of inflation decelerating.

Firstly, the consumer price index for March 2023 rose by 0.1% and 5.0% on a month-on-month (m-o-m) and year-on-year (y-o-y) basis (which were 0.1% better than expectations) with core CPI rising by 0.4% m-o-m and 5.6% y-o-y, which were in-line with forecasts.

Meanwhile the producer price index for March 2023 posted a 0.5% decline on an m-o-m basis, which was far better than economists’ expectations of a flat zero percent. In addition, advanced retail sales data indicated that retail sales fell by 1% in March 2023, more than the 0.5% fall expected by economists.  

The 10-year US Treasury (UST) yields rebounded back by 11 basis points to 3.52% from 3.41% in the previous week, bringing it back to the same level just over two weeks ago. This increased the total yield gains over the past 52 weeks to 69 basis points.   

The UST 2-year yields also rebounded back by 11 basis points to 4.10% from last Friday’s close of 3.99%. This continues the yield curve inversion between the UST 2-year and 10-year notes into its 40th consecutive week with the yield spreads maintained at -58 basis points.  

However, the 10-year MGS bond yields fell another 4 basis points to 3.83% from 3.87% last Friday causing the yield spreads between both countries’ 10-year bonds to narrow to 31 basis points from 46 basis points last week.  

ECONOMICS

The Department of Statistics Malaysia disclosed that Malaysia’s natural rubber production in February 2023 declined by 2.7% on a year-on-year (y-o-y) basis to 27,209 tons, from 27,950 tons in February last year.

On a month-on-month basis, it declined by 7.9% from 29,451 tons in January 2023. Production of natural rubber was mainly contributed by smallholders (87.3%) followed by estates at 12.7%.

China is the largest importer for natural rubber exports in February 2023 comprising 56.9% of total exports, followed by Germany (7.3%), Turkey (3.6%), US (2.1%) and Egypt (1.5%). The main exported natural rubber products were gloves, tyres, tubes, rubber threads and condoms.  

The International Monetary Fund (IMF) has reduced its global real GDP growth forecast by 0.1% from its earlier forecast in January 2023 to 2.8% and 3.0% for 2023 and 2024 respectively due to weaker economic performances in certain larger economies and expectations of further monetary policy tightening to combat inflation.

It also raised its 2023 core inflation forecast to 5.1% from 4.5% in its January 2023 forecast as it predicts inflation has yet to peak in many countries. It added that banking system contagion risks were contained by strong and decisive policy actions by the US and Swiss central banks following the collapse of two US regional banks (Silicon Valley Bank & Signature Bank) and Credit Suisse.

IMF assumes that the global oil prices for 2023 is US$73 per barrel which is below the current Brent crude oil price of US$86 per barrel.  However, IMF clarified that for every 10% increase in oil prices, its economic models indicate that it will reduce economic growth by 0.1% and result in a 0.3% increase in inflation.    

CURRENCY

The Ringgit consolidated over the course of the week following two consecutive weeks of gains. It gave ground against all of the major currencies last week with the exception of the Japanese Yen RM3.3020 / JPY100 (-3.10sen).

The local currency ended the week lower against the US Dollar at RM4.4000 / USD1.00 (+0.30sen), the Singapore Dollar at RM3.3150 / SGD1.00 (+0.94sen), the Euro at RM4.8533 / EUR1.00 (+5.29sen) and the British Pound at RM5.4886 / GBP1.00 (+1.89sen).

MY OPINION

The local equities market performed as expected last week as it gained strength and momentum (based on trading value).

As it has re-tested and closed above the 1,430 points level, I expect it to be range this week due to the upcoming Hari Raya Aidilfitri holidays before gradually heading towards 1,450 points level on the back of further positive news flow.      

The performance of the US bond market last week indicate that bond fund managers are still uncertain in their outlook on inflation and interest rates cut expectations which causes the yields of US Treasuries swing more or less on a weekly basis.

Currently, UST-10 year yields are back to its level in 2nd half of September 2022 and at this level – has roughly priced in a 175 basis points reduction in Federal Funds Rate (FFR). The FFR from 21 September 2022 onwards was 3.00% - 3.250% as compared to 4.75% - 5.00% currently.

As such, I think the US bond market could have run ahead of itself as the market still has to factor in the probability of a final 25 basis points rate hike to the FFR in May 2023 by the US Federal Reserve as well as the possibility of the FFR being maintained at 5.00%-5.25% throughout 2023.         

The performance of the Ringgit was within expectations last week in the absence of any major developments in the financial markets.

Going forward it is likely to continue to trade between RM4.35 - RM4.45 in the coming week as the industry looks forward to the upcoming Bank Negara Monetary Policy Committee Meeting on 2-3 May 2023.  - 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