MARKET REVIEW

Asia’s stock markets managed to turn broadly higher across the region as Japan data suggested that the core machinery orders were greater-than-expected in August, suggesting a potential growth in capital expenditure. The Nikkei 225 rose 0.16%, while Hang Seng Index and Shanghai Composite Index added 0.08% and 0.8%, respectively. 

On the local front, FBM KLCI bucked the regional trend and plunged sharply lower by 2.20% to 1,735.18 pts amid rising concerns over possible introduction of new taxes in the upcoming Budget 2019 as well as the challenging outlook on the construction sector. Market breadth was extremely bearish with decliners overwhelmed advancers by a ratio of 9-to-1, accompanied by higher traded volumes of 3.02bn, worth RM2.96bn.

Wall Street closed on a bearish tone as the Dow ended 3.15% lower to 25,598.74 pts (worst performance in 8 months) amid concerns over rapid rising interest rate and technology giants were leading the sell down yesterday. The S&P500 and Nasdaq plummeted 3.29% and 4.09%, respectively.

TECHNICAL OUTLOOK: KLCI

Based on the downward violation of the mini head and shoulders formation, the FBM KLCI has hit the targeted zone around 1,730-1,735. With the short term oversold status, we could expect mild technical rebound. Nevertheless, upside will be limited as investors will be trading cautiously ahead of Budget 2019. Resistance will be envisaged around 1,750-1,760. Support will be pegged around 1,700-1,730.

We see limited upside rebound on the FBM KLCI and negative broader market sentiment with the weak construction outlook, coupled with speculation of new taxes that could be implemented in the upcoming Budget 2019. Hence, investors will be taking a cautious approach at least for the near term until more clarity on 2nd Nov; limiting the upside potential of KLCI around 1,750-1,760.

TECHNICAL OUTLOOK: DOW JONES

The Dow has violated the psychological level of 26,000 after diving more than 3% yesterday and the MACD Histogram expanded negatively below zero. The RSI and Stochastic oscillators are turning weaker; indicating that the negative momentum is intact. We believe there could be more downside on the Dow over the near term, with the next support located around 25,000-25,150 range. Meanwhile, the Dow’s upside will be capped around 26,000.

With investors focusing on the interest rate upcycle environment and the speedy pace of rising 2-year and 10-year Treasury notes, it could be sending worrying signals through Wall Street that higher borrowing costs may slow down the economy, dampening the sentiment on stock markets, eventually. Hence, we may expect further downside risk towards the stock markets at least over the near term.

Source: Hong Leong Investment Bank Research - 11 Oct 2018