WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN
SELLING pressure continues to be persistent in the local equities market as investors continued to take money off the table after the US Federal Reserve’s Federal Open Market Committee (FOMC) raised the Federal Funds Rate to 3.00%-3.25% and maintained its hawkish outlook on the FFR for the rest of the year.
Consequently, the benchmark KLCI Index ended the week at 1,424.98 points (-42.33 points or -2.9%) on the back of continued lackluster trading volume and value.
My view on the Malaysian equities market remains unchanged in the near term due to the lack of market catalysts. I believe the KLCI will hold around the 1,400 – 1,450 points level in the coming week until the tabling of Budget 2023 on 7 October 2022.
Bond yields rose for a fifth consecutive week after the US Federal Reserve’s Federal Open Market Committee (FOMC) increased the Federal Funds Rate by 75 basis points hike to a range of 3.00%-3.25% which is 50 basis points above the current Overnight Policy Rate (OPR).
As a result, bond yields for the 10-year UST skyrocketed by another further 23 basis points on top of last week’s gain of 12 basis points to 3.68% from 3.45% last week. This bring the total yield gains for the last four weeks to 65 basis points.
The UST 2-year yields also rose to their highest level since November 2007 when it ended the week at 4.19% from last Friday’s close of 3.90%.
The jump in the UST 2-year yields meant that the yield curve inversion between the UST 2-year and 10-year notes continues into its 11th consecutive week and widens further to a massive -51 basis points from -42 basis points in the week before. The long-term average of the yield spread for both UST is +0.92% or +92 basis points.
As expected, selling pressure in the 10-year MGS bonds accelerated over the past week due to the rising yields of the UST 10-year bonds. The 10-year MGS yields ended the week 14 basis points higher at 4.27% from 4.13% last Friday.
The jump in both the UST he MGS yields brings the yield spreads between both countries’ 10-year bonds to narrow further by 9 basis points to just 59 basis points.
With the US FOMC expected to continue raising the FFR by another 1.25% in its next two meetings, coupled with the current narrow yield spread (as compared to over 200 basis points before the start of the interest rate hikes), I expect the MGS to remain under selling pressure in the near term.
Malaysia’s Consumer Price Index (CPI) for the month of August 2022 increased by 4.7% on a year-on-year basis from 4.4% in July 2022 on the back of continued inflationary pressures in the food and non-alcoholic beverages segment which rose by 7.2%.
The food away from home sub-segment rose by 8.4% while the food at home sub-segment increased by 6.4%. However the Department of Statistics disclosed that there were still some food items whose prices fell on a month-on-month basis such as chicken (-3.8%), barramundi (-2.4%) and vegetables such as cucumber (-4.6%) and round cabbage (-2.6%).
Bank Negara Malaysia disclosed that it will continue to closely monitor the movements of the Ringgit to ensure that the foreign exchange market continues to function and intermediate effectively.
The daily onshore FX transaction volume has been increasing in 2022 with an average of US$13.3 billion against US$11.3 billion per day in 2021.
It added the US Dollar has gained significantly due to the aggressive monetary policy tightening by the US Federal Reserve.
The bond market activity also remains healthy and supportive of institutional investors and financial institutions.
Grocery delivery service provider HappyFresh announced that it will be ceasing its operations in Malaysia after seven years due to the challenging economic situation.
The Jakarta based startup has hired turnaround firm Alvarez & Marsal Holdings LLC to review its financial situation as it struggles to to raise new funds to finance its operations.
The Malaysian Timber Industry Board is targeting domestic sales in wood products and timber exports to reach RM20 billion and RM28 billion in 2025 respectively through the active promotional campaigns in the mass media and exhibitions.
The US Dollar continued to strengthen against the Ringgit in anticipation of another potential 75 basis points hike at the next US Federal Reserve Meeting on 1-2 November 2022.
The market then expects the Fed to further hike rates by another 50 basis points at its last FOMC meeting for 2022 on 13-14 December 2022. This time, preliminary indications show are that both the bond and equities market contributed to the currency outflows over the past week.
The local currency ended the week at RM4.5770/USD1.00 (+4.4sen) which is also a new 24-year low against the greenback.
The Japanese Yen bounced back strongly against the Ringgit and other currencies as the Japanese central bank intervened in the money market for the first time since 1998 to help support the Yen. Consequently, the Japanese Yen rebounded back to end the week at RM3.1990/JPY100 (+3.1sen) against the Ringgit.
Conversely, the Ringgit also ended the week stronger against the Euro at RM4.4679/EUR1.00 (-6.9sen), the British Pound at RM5.0661/GBP1.00 (-10.8sen) and the Singapore Dollar at RM3.2136 / SGD1.00 (-1.0sen).
Given the heightened volatility in the money markets over the past few days, I am adjusting my forecast on the Ringgit/USD trading band to between RM4.55 to RM4.60 in the coming week.
For the other major currencies, I am maintaining my view that they will continue consolidating for the next few weeks barring any unexpected developments. - DagangNews.com