We see several key themes that will dominate the mood of investors and traders this week. Theme #1: Focus is on the new US Fed Chair Jerome Powell; Theme #2: Italy’s March 4 Election; Theme #3: Some nervousness on the euro; Theme #4: The South Korean Central Bank dilemma; Theme #5: Eurozone banks; and Theme #6: Malaysia’s inflation.

• We see several key themes that will dominate the mood of investors and traders this week.

• Theme #1: Focus is on the new US Fed Chair Jerome Powell. He will make his first big appearance in front of the Senate Banking Committee as he presents the semi-annual monetary policy report. Powell had quite a welcome when he took office as the new Fed Chair on Saturday, 3 Feb. The focus will be whether he will “put” for stocks should the market turn ugly again since the notion under the previous Fed chair’s is that the central bank would always be there to prop up markets. Thus far, he has only pledged to stay alert on any developing risks to the financial stability while the markets hope his testimony to Congress this week will offer clues. We believe he will most likely reinforce the message from the recent Fed meeting minutes that inflation and interest rates will continue to rise.

• Theme #2: Italy’s March 4 Election: We believe that for months the markets have comfortably ignored the Italy’s upcoming March 4 election. While some see the pre-election volatility as an opportunity to snap up Italian debt, we should be mindful against complacency. The Italian election, the third-biggest economy in euro zone, is expected to produce a hung parliament. And if parties cannot agree on a coalition, fresh elections cannot be ruled out. Polls indicate a strong result for the antiestablishment 5-Star Movement, while Silvio Berlusconi’s centre-right bloc could also deliver a surprise. But success for the League, which calls the euro a “failed currency,” will revive a Euro break. It is only now that investors have started to take note and the nervousness raised Italy’s 10-year bond yield spread over German at 1.411% from a low of 1.202% on February 7 while the highest in 2018 is on January 3 at 1.625%.

• Theme #3: Some nervousness on the euro. The euro dollar, which moved to a three-year high above US$1.25, could experience some level of nervousness. The region will see the Italian election as well as the German vote on forming a coalition government while the USD is gaining some momentum from the US Treasury yields. It can put the euro on course for its second weekly loss in four months.

• Theme #4: The South Korean Central Bank dilemma: The key issue is whether the central bank of South Korea will raise rates at its 27 Feb meeting. We believe the policy rate is expected to stay unchanged at 1.50% but could follow up on a rate hike in May. Meanwhile, the household debt/GDP is at 90%, which needs attention where the bank must discourage further lending. A rate hike will strengthen the South Korean won and influence export competitiveness, which is an issue. Besides, the economy needs to grapple with US protectionism and anti-dumping duties which have been slapped on Korean steel and transformers, while tariffs have been imposed on solar panels and washing machines.

• Theme #5: Eurozone banks: The banks’ shares attracted strong appetite from the monetary policy normalization. However, with our view that the US Fed should raise rates three times while the ECB will only end the quantitative easing by 4Q2018 and leaving the rates unchanged, suggest the banks have embarked on the slow lane. So we believe one should take a long position on the European banks since we expect the bank stocks to benefit from equity portfolios rotating towards cyclical line of story to capture the euro economic recovery that will support banks’ retail activity and helped reduce bad loans.

• Theme #6: Malaysia’s inflation: The January inflation data will be announced this week. We expect the inflation to be around 2.8% y/y from December’s 3.5% y/y and 3.2% y/y in January 2017. Inflation, to some extent, will be softened due to the stronger USD/MYR, averaging at 3.96 (January 2017 average was 4.46) which should have lowered some level of the import cost. Meanwhile, the average oil prices in January was US$63.55 bpd for WTI (January 2017: US$52.65) and US$68.98 bpd for Brent (January 2017: US$55.51 bpd)

Source: AmInvest Research - 26 Feb 2018