MARKET REVIEW

Asian markets ended higher, taking cues from a 177-pt rebound on Dow overnight following news that Washington and Beijing will restart face-to-face talks next week. Trading tone was also positive ahead of the 30-31 July FOMC meeting, as consensus are expecting a minimum 25 bps cut. The Shanghai Composite Index and Hang Seng Index rose 0.8% and 0.4%, respectively, while Nikkei 225 added 0.4%.

Bucking positive overnight Dow and regional markets, KLCI continued its consolidation mode to ease 3.3 pts at 1652.4 after fluctuating within 1659.4 and 1651.4 levels, led by sell down in MAYBANK, PCHEM, TENAGA and PETGAS. Market breadth was mildly positive with 445 advancers vs. 431 decliners, accompanied by 3.22bn shares worth RM2.29bn as compared to Tuesday’s 2.77bn shares valued at RM2.02bn.

Tech companies led the S&P 500 (+0.5% to 3020) and the Nasdaq (+0.9% to 8321) to record closings overnight but the Dow lost ground (-0.3% to 27270) on downbeat earnings. The tech rally was fuelled by hints from Texas Instruments Inc that the slowdown in semiconductor demand would not be as long as feared while the Boeing and Caterpillar dragged the blue chip Dow lower after their second-quarter earnings fell short of analyst expectations. Boeing posted its biggest loss in a decade, owing to the grounding of its 737 MAX aircraft, while Caterpillar was challenged by weak China sales in the face of the trade war.

TECHNICAL OUTLOOK: KLCI

Following the 7.8% relief rally from 1572 (14 May) to 1694 (2 July), KLCI has retraced 2.5% to close at 1652.4 yesterday, marginally higher than the LT downtrend line support near 1648. Despite oversold slow stochastic reading, KLCI is envisaged to undergo an extended consolidation amid a decisive break down below the 200D SMA (now at 1675), compounded by the weak MACD indicators. Should the index convincingly break below 1648, the outlook could turn bearish and KLCI could slip further towards 1633 (50% FR) territory. Conversely, key resistances are near 1665 (23.6% FR) and 1675 levels. Only a strong breakout above 1675 could spur the index to revisit 1690-1700 zones.

Ahead of the two major events next week focusing on the resumption of trade talks in Shanghai and FOMC meeting (30-31 July), we expect sentiment on the broader market to remain mildly positive, despite rotational selling pressures among index-linked heavyweights. Technology stocks are likely to hog the limelight amid all-time high Nasdaq whilst oil & gas stocks should stay supported with rising geopolitical tensions shoring up global oil prices.

TECHNICAL OUTLOOK: DOW JONES

The Dow’s underlying trend remains firm as the index continued to stay above the 20D SMA and 30D SMA levels. We look towards the Dow to retest all-time high of 27398 (15 July), where a break above would spur the index higher towards 27500-28000 territories. However, as the relevant technical readings are hovering at toppish quadrants, this could cap further significant upside. Retracement supports are set around 26800-27000 zones.

In the near term, all eyes continue to focus on the ongoing reporting season and the resumption of US-China trade negotiations next week. While most companies are beating revised-down estimates, the tone and substance of management commentary is on the cautious side, with uncertainty about global trade as notable headwind. Up to now, the total S&P 500 earnings are expected to decline 1.3% YoY from -3% before the reporting season starts. Having said that, market sentiment is largely positive in anticipation of a minimum 25 bps cut during the 30-31 July FOMC meeting. We see the Dow to continue to trend at range bound mode within 26800-27500 zones.

Source: Hong Leong Investment Bank Research - 25 Jul 2019