Market Review

• Tracking a 1.4% rally on Dow overnight, most Asian markets inched up on Friday’s morning before closing mixed on profit taking. Overall, a synchronized global economic growth, expectations the Fed will keep raising interest rates in 2018 and technically overbought markets will trigger near term volatility into year-end, offsetting positive optimism of Trump’s tax overhaul plans.

• Ahead of an extended long weekend holiday (Bursa Malaysia was closed on 1 Dec for Birthday of Prophet Muhammad) and 30 Nov index rebalancing exercise following the relisting of the Sime Darby demerger group, KLCI eased 2.5 pts to 1717.9 (+0.63 pts wow) after fluctuating within a range of 10.9 pts between an intra-day high of 1727.6 and a low of 1716.8.

• After rallying 1.4% on 30 Nov, the Dow succumbed to heavy profit taking pullback after a report Michael Flynn, the former national security adviser, would testify he was directed to make contact with Russians during the presidential campaign in 2016. The Dow tumbled as much as 350 pts before narrowing the losses to 40 pts at 24231 (+2.9% wow) as sentiment remained buoyant, due to Trump’s positive economic agenda as well as sweeping tax reforms, which were widely credited with fueling the stock market’s record-setting streak.

Technical View

Extended consolidation amid failure to break 1728 hurdle

• After hitting intraday high of 1727.6, a tad below our envisaged 1728 (38.2% FR) resistance, KLCI ended 2.5 pts lower at 1717.86 to form an inverted hammer pattern, pointing to a prolonged sideways consolidation. Crucial supports are situated at 1700-1706 levels. A breakdown below 1700 will trigger more selldown towards 1685 (61.8% FR) and 1658 (76.4% FR) levels. On the flip side, a decisive breakout above 1728 will drive index higher to 1735 (downtrend channel) and the formidable 1753 (200-d SMA) zones.

Market Outlook

• Despite short term volatility triggered by Flynn’s probe, Dow mid to long term outlook remain bright amid positive expectations of Trump’s tax overhaul plans, positive economy & corporate earnings outlook and supportive monetary policies coupled with expectations of more business-friendly policies. Key supports are 23k while upside targets retain at 24.3-24.8k.

• As 3Q17 reporting season was over (generally within market expectations), KLCI could inch up further in the seasonally stronger Dec month amid year-end window dressings (average of 1.9% gains in the last 10 years with a 90% successful hit rates), supported by ringgit appreciation bias and oil price strength. Nevertheless, overall sentiment will remain edgy, underpinned largely by GE14 uncertainty and 2018 earnings prospects coupled with fears of vicious economic cycle as a result of the current episode of property imbalances.

Source: Hong Leong Investment Bank Research - 4 Dec 2017