Ringgit should remain relatively robust this week due to interest from foreign investors in local equity, bond markets - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local stock market was generally range bound over the past week as we saw follow through buying support coming in to help the KLCI Index remain above the 1,400 points level.

The benchmark KLCI Index ended the week just a shade higher at 1,413.52 points (1.43 points or +0.10%). Trading activity also picked up in tandem with the turn in sentiments to RM2.06 billion per day from RM1.91 billion per day last week.

The overall trading value for the week has improved to 7.8% above the past 100-day average daily trading value of RM1.88 billion per day.

In the bond market, bond yields were generally flattish as bond traders chose to remain on the sidelines ahead of the US Federal Reserve’s Federal Open Market Committee (FOMC) meeting next week (25-26 July 2023).

Currently, the economists are generally expecting the US central bank to announce a further 25 basis points rate hikes to the Federal Funds Rate (FFR) when its meeting concludes.

Nevertheless, the entire market will be focusing at the outlook on the economy and interest rate from the FOMC.

After next week, the US Federal Reserve has another three (3) more meetings in 2023 and the central bank has earlier indicated that it is open to use a wide range of options for monetary policy developments, including further interest rate hikes.

Therefore it is unsurprising that the 10-year US Treasury (UST) yield ended the week was virtually unchanged at 3.83% but the total yield gains over the past 52 weeks to rose to 101 basis points.

However, the UST 2-year yields rose seven (7) basis points to 4.84% from last Friday’s close of 4.77%. This extends the yield curve inversion between the UST 2-year and 10-year notes to 53 weeks with yield spreads widening further to -101 basis points from -94 basis points last week.  

The 10-year MGS bond yield rose by a marginal two (2) basis points last week to 3.83% last Friday from 3.81% in the previous week. The yield spreads between both countries’ 10-year bonds are now trading at parity from a negative carry position of -2 basis points last week.    

ECONOMICS

RAM Rating Services Bhd (RAM) disclosed that foreign investors remained net purchasers of Malaysian bonds for the sixth successive month in June 2023. The credit rating agency added that the overall foreign funds inflow accelerated further to RM5.2 billion (May: RM3.0 billion), led by the Malaysian Government Securities (MGS) and Islamic Malaysian Government Issues (GII).

MGS yields generally largely trended upwards in June 2023 amid expectation of further interest rate hikes in the US. RAM expects the bond market sentiment to improve throughout the rest of this year on the back of the US Federal Reserve nearing the end of its rate hike cycle.

The Ministry of Investment, Trade and Industry (MITI) announced that Malaysia’s trade surplus increased by 11.3% year-on-year (y-o-y) to RM25.81 billion in June 2023, marking the 38th consecutive month of trade surplus since May 2020. The trade surplus for June 2023 was also the highest monthly value ever recorded in the month of June.

However, MITI said total trade contracted by 16.3% to RM222.14 billion in June 2023, as exports fell 14.1% to RM123.98 billion while imports decreased by 18.9% to RM98.16 billion due to slower global demand and lower commodity prices.

Malaysia’s performance was similar to other regional markets such as China, Singapore, Indonesia, Taiwan and South Korea, which also recorded negative trade growth for June 2023 respectively.

CURRENCY

The Ringgit’s performance over the past week was mixed against the major international currencies during the week as we noticed some profit taking following recent gains.

The local currency ended the week lower against the US Dollar at RM4.5570 / USD1.00 (+3.40sen) but gained ground against the Singapore Dollar at RM3.4260 / SGD1.00 (-0.20sen), the British Pound to RM5.8610 / GBP1.00 (-7.10sen), the Japanese Yen at RM3.20 /JPY100 (-10.00sen) and the Euro at RM5.0740 / EUR1.00 (-1.00sen) respectively.

MY OPINION

The KLCI Index performed according to my expectations last week as it moved within the 1,400 -1,430 points range.

It was also encouraging to see that the trading volume and value has increased due to consistent buying activities from foreign fund managers.

Nevertheless, I expect the KLCI to continue trading in this range in the coming week in the absence of any major developments on the local front. 

The UST and MGS 10-year bonds are currently trading at par due to steady interest in the MGS from foreign investors but I expect yields spreads to widen in the coming weeks; especially if the US Federal Reserve increases the FFR next week.

However, the movement is not expected to be large as I am only looking at the yield spreads to widen slightly (+/- 10 basis points) in the near term.   

The Ringgit performed according to my expectations last week despite weakening against the US Dollar due to its high correlation with the Chinese Renminbi (RMB) as well as slowing trade activities.   

Nevertheless, the Ringgit should remain relatively robust in the week ahead due to the interest from foreign investors in both the local equity and bond markets. I adjust my forecast on the US Dollar trading band at between RM4.50 – RM4.60 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 and has been writing his economic analysis on a weekly basis in DagangNews.com since 2022      

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