Market review

• The MSCI Asia Pac index ended 0.3% lower to 139.3 (+11% from Brexit low and 23% YTD) on profit taking after hawkish comments from New York Fed chief that the central bank could potentially raise interest rates as soon as next month while Atlanta Fed chief remarked that he’s confident growth is accelerating enough for at least one hike in 2016.

• Despite a mixed regional markets, KLCI remained resilient as the index erased early losses of 3.9 pts to end 0.6-pt higher as sentiment was boosted by Ringgit strength, recovering crude oil and CPO prices coupled with Fitch’s affirmation of Malaysia’s A- ratings.

• The Dow recorded a 2nd straight gains (+23 pts at 18598) as sentiment was boosted by extending oil rally in oil prices as Russian Energy Minister Alexander Novak said that the nation was open to discussing a freeze ahead of an informal talks next month may lead to action to stabilize the market. Sentiment was also helped July FOMC minutes, which suggest a very go-slow approach for the next rate hike.

Technical Insights

• KLCI to continue its mild consolidation

• After staging a sharp rebound from Brexit’s low of 1611 t o as high as 1700 on 16 Aug, KLCI daily and weekly slow stochastic indicators have turned increasingly overbought, which could signal potential profit taking consolidation mode. Key supports are 1684 (61.8%) and 1675 (resistance-turned-support of 19 July high).

• However, we only expect a mild pullback amid the bullish weekly MACD and RSI indicators. We remain positive that the index will break the 1700 decisively after a brief consolidation, marching higher to test 1716 (100-w SMA), 1729 (YTD high) and 1739 (LT objective) in the long term.

Market Strategy

• We expect KLCI to engage in a mild consolidation amid overbought KLCI daily and weekly slow stochastic indicators. Sentiment may turn more cautious as we embrace a flurry of big caps results in the next two weeks during the ongoing Aug reporting season.

• However, any pullback will be well absorbed in anticipation of more stimulus-driven and accommodative policy measures by key central banks and government, the return of higher yield seeking funds into emerging markets and rebound in the “Twin” crude oil and palm oil prices coupled with stabilizing Ringgit.

• Stock on radar (separate report). Today, we highlight EG (Trading Buy) following a downtrend line breakout on 15 Aug. We believe EG is ripe again to advance further towards RM0.935-1.08 targets in the medium to long term. Key supports are situated at RM0.86-0.87. Cut loss at RM0.84

Source: Hong Leong Investment Bank Research - 19 Aug 2016