The market movement in the coming weeks will be crucial as an indicator for the year - Manokaran

WEEKLY MARKET ANALISIS BY MANOKARAN MOTTAIN

THE local stock market performed as expected with the benchmark KLCI Index briefing breaking the 1,500 points barrier last Friday to hit an intraday high of 1,503.33 points on the back of continued window dressing activities.

However, mild profit took hold towards the end of Friday’s trading session causing the KLCI to close out the year at 1,495.49 points (+20.81 points or +1.41%).

Daily trading value bounced back by over 20% against the previous week to around RM1.92 billion per day thanks to last Friday’s (30 December 2022) surge in trading value of RM2.51billion.

The KLCI Index weekly volatility remains low (based on day end closing prices) at 1.4% over the past week despite the window dressing activities. On an annual basis, the KLCI Index fell by -4.6% as it started the year at 1,567.53 points.

However, US bond yields continued to rise on continued profit taking as stronger than expected economic data (especially job and wages growth) indicate that the US Federal Reserve will continue to gradually raise the Federal Funds Rate to its expected terminal rate of 5.10% and maintain it for the entirety of 2023.

The 10-year US Treasury (UST) yields continued to rally for the second consecutive week, rising by 13 basis points last week to 3.88% from 3.75%. This brings the total yield gains over the past 18 weeks to 85 basis points.

On a year to date basis, the 10-year UST yields rose by a massive 225 basis points from 1.63% at the start of the year on the back of the interest rate upcycle. The all-time record low yield for the 10-year UST was 0.55% in July 2020.   

The UST 2-year yields rose by a smaller margin of 10 basis points to 4.42% from last Friday’s close of 4.32%. This brings the yield curve inversion between the UST 2-year and 10-year notes into its 25th consecutive week.

The yield spreads narrowed for the fourth consecutive week to -54 basis points from -57 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 relatively stable over the past week as the 10-year MGS bond yields remained unchanged at 4.07% last Friday. The latest result significantly narrowed the yield spreads between both countries’ 10-year bonds to a razor thin 19 basis points from 32 basis points last week.

ECONOMICS

Malaysia’s Producer Price Index (PPI) fell to 3.2% year-on-year (y-o-y) in November 2022 from 4.0% in October 2022. Our country’s PPI remains much lower compared to other countries across the world such as Germany (+28%), Japan (+9.3%), US (+7.4%), Thailand (+7.2%) and South Korea (+6.3%).

The decline was attributed to lower inflationary pressures in the agriculture, forestry and fishing sector which contracted by -18.5% y-o-y. However, it decline was mitigated by gains in other sectors such as the manufacturing (+6.2%), water supply (+4.2%), mining (+2.45) and electricity & gas supply (+1.4%).  

The Department of Statistics disclosed that Malaysia’s economy is expected to grow between 4.0% - 5.0% in 2023, which is also in line with International Monetary Fund (IMF) global forecast. This is faster than the global economy projection by the IMF projection at 2.7% next year.

Meanwhile, the 2023 growth forecast for the Asian region is 4.6% based on the Asian Development Outlook Supplement for December 2022. In a separate announcement, Malaysia’s official reserve assets amounted to US$109.71 billion (RM484 billion) as at 30 November 2022 based on IMF’s special data dissemination standard format.  

Malaysia’s export prices fell by 0.7% month-on-month in November 2022 to 148.7 points from 148.7 points in the previous month while the import value index remains virtually unchanged at 133.2 points. The decline was due to a dip in the indices of animal, vegetable oils and fats (-6.8%), inedible crude materials (-1.5%) and mineral fuels (-0.6%). The export volume index also decreased by -0.4%) due to a drop in the indices of mineral fuels (-23.6%) and manufactured goods (-3.1%).   

CURRENCY

The Ringgit rallied against the US Dollar to end the year on a slightly higher note at RM4.4015 / USD1.00 (-2.0sen). Window dressing activities in the equity market and expectations for a tapering of interest rate hikes in the US helped to push up the local currency last Friday.  

The performance of the Ringgit against the other major currencies was again mixed over the past week with the local currency only gaining against the British Pound at RM5.3003 / GBP1.00 (-3.0sen). The Ringgit lost ground against the Euro, Japanese Yen and Singapore Dollar ending the year at RM4.7027 / EUR1.00 (+0.5sen), RM3.3380 / JPY100 (+1.4sen) and RM3.2856 / SGD1.00 (+1.4sen)  respectively. 

MY OPINION

I expect the benchmark KLCI to retreat in the coming week as it starts to give up some of its gains from the year-end window dressing activities. The longer term view will be dependent on the performance of the Ringgit in the coming two weeks as the KLCI lost all of its window dressing gains for end-2021 within the first week of January 2022.

Hence, the market movement in the coming weeks will be crucial as an indicator for the year. Hopes for the pre-Chinese New Year rally may not materialize as trading volume and value (excluding window dressing) remains muted at the RM1.8 billion per day level.

The next catalyst for the market would be the revised Budget 2023, which is to be re-tabled in Parliament on 24 February 2023. The budget presentation and debate process will take 21 days.      

The wafer thin yield spreads between our local 10-year MGS yields and 10-year US Treasury Bills indicates that the near term outlook is negatively biased. In addition, the market expects Bank Negara‘s Monetary Policy Committee to raise the Overnight Policy Rate by another 25 basis points at its upcoming meeting on 18 & 19 January 2023.

Meanwhile the US Federal Reserve’s Federal Open Market Committee will hold its first 2-day meeting on 31 January 2023 & 1 February 2023 with the market expecting another 50 basis points hike following that meeting. This will further put pressure on the bond prices to fall and yields to rise again as I doubt the bond market has fully priced in the effects of the potential hikes in 2023.    

For the currency market, I am maintaining my view that the Ringgit will remain range bound between RM4.40 and RM4.45 against the US Dollar in the coming week. Similar to the equity market, the Ringgit may give up gains that came from the year-end window dressing activities.  

I would like to take this opportunity to wish all readers a very Happy, Healthy & Prosperous 2023! - 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