MARKET REVIEW

Taking cues from a listless trade on Wall Street overnight, Asian markets drifted lower as investors watched for G20 summit developments. Last Saturday, Trump and Xi were scheduled to meet to de-escalate a protracted trade war that is damaging the global economy and souring business confidence.

In line with the tepid regional markets and Wall Street, KLCI eased 0.57-pt to 1672.1 (-10.1 pts WoW/+21.3 pts MoM), after hovering 6.5 pts between an intra-day high of 1677.3 and a low of 1670.8, due to lack of local impetus and awaiting the crucial President Trump-Xi meeting. Trading volume increased to 2.22bn shares worth RM1.84bn against Thursday’s 1.84bn shares worth RM1.90bn. Market breadth was negative with 334 gainers vs 413 losers.

The Dow jumped as much as 112 pts, led by major banks after the positive Fed’s 2nd round of stress test results. However, the gains reduced to 73 pts at 26600 ( -0.44% WoW/+7.21% MoM), as investors awaited the Trump-Xi trade meeting scheduled last Saturday. To recap, Beijing has called on Washington to cancel its import tariffs and sanctions measures on Huawei and other Chinese companies, while Trump has reiterated a threat to impose tariffs on the remaining USD300bn of Chinese imports if talks fail.

TECHNICAL OUTLOOK: KLCI

Following the 7% relief rally from 1572 (14 May) to 1682 (21 June), KLCI continued its profit taking consolidation to end 0.6-pt lower at 1672.1, recording its 3rd straight losses prior to the President Trump-Xi meeting. Given the positive outcome from President Trump-Xi meeting last Saturday, KLCI is expected to advance further 1682/1687/1700 levels this week while supports are situated near 1668 (10D SMA), 1655 (23.6% FR) and 1640 (38.2% FR) levels.

After the ice-breaking Trump-Xi talk last Saturday, KLCI may breathe a sigh of relief, boosted by a truce in the US-China trade war and a resumption of trade negotiations after a six-week stalemate. Moreover, Trump said that he will allow Huawei to buy some products from U.S. suppliers and Xi agreed to buy a “tremendous” amount of US agricultural products. Thus risk assets i.e. stocks, commodities and emerging markets are set to rally while the safe -havens gold, yen and Swiss franc could take a breather, but the lack of a timeline for progress on key issues, namely, intellectual property rights and technology transfer may cap “bullish topside ambitions”. Resistance is pegged at 1682-1700 while supports are near 1655-1668 levels.

TECHNICAL OUTLOOK: DOW JONES

After falling 1.6% or 442 pts from YTD high of 26907 (21 June) to a low of 26465 (27 June), the Dow staged a 73-pt technical rebound to end at 26600 last Friday. Overall, recent Fed’s dovish tone and last Saturday’s US-China trade truce should spur the Dow on a short term reprieve to retest 26907-27000 zones, after maintaining its posture above 10D SMA. Supports are situated at 26500, 26200 and 26000 zones.

After the crucial bilateral President Trump-Xi meeting last Saturday, there is a chance for Dow to retest all-time high at 26952 (3 Oct 2018). However, we believe further significant upside is dented by legacy issues, namely, intellectual property rights and technology transfer. On Fed rates direction, consensus are unlikely to significantly reduce their expectations for a rate cut in July despite global trade tensions easing, with focus on this week’s upcoming ISM manufacturing & services as well as the US payrolls data. Meanwhile, the US 2Q19 earnings season will commence next week, with the consensus estimate earnings for the S&P 500 companies to ease 2.9% YoY from a flat growth reading in the 1Q19 amid a combination of slowing economic growth and rising input expenses. Resistance is pegged at 26900-27200 while supports are near 26200-26500 levels.
 

Source: Hong Leong Investment Bank Research - 1 Jul 2019