While bargain hunting in telcos and key utility stocks highlighted trade early last week, buoyed further by a rebound in global technology stocks, the broader market stayed mixed on concerns over China’s struggling economy and a hawkish US central bank. Losses picked up mid-week, with concerns over China’s slowing economy and US interest rates staying higher for longer dampening market sentiment. The cautious sentiment prevailed as investor await cues on interest rate direction from the global central bank summit in Jackson Hole, Wyoming, over the weekend. Hawkish commentary from Fed officials suggesting interest rates will need to remain elevated for longer to bring inflation down did not help sentiment.

For the week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) eased 1.68 points, or 0.12 percent, to 1,444.41, as falls in Public Bank (- 5sen), KLK (-92sen), AMBank (-19sen), Dialog Group (-7sen) and Petronas Dagangan (- 68sen) offset gains on CIMB (+6sen), Press Metals Holdings (+13sen), Sime Darby (+9sen) and Petronas Chemicals (+10sen). Average daily traded volume last week was lower at 3.42 billion shares, compared to 3.71 billion shares the previous week, while average daily traded value eased to RM2.14 billion, against the RM2.18 billion average the previous week.

The conclusion of state elections two weeks ago restored hopes that the unity government will provide political stability until the next general election but that did not prevent foreigners from turning net sellers again last week after being net buyers in the first three weeks of August. Risk averse mood prevailed last week as investors digested global news flows that alluded to weaker economic growth trajectory as China dragged its feet over aggressive stimulus and the US Fed determined to fight inflation at the expense of economic growth, while they waited for the conclusion of the second quarter results reporting season. The downbeat sentiment is expected to prevail this week.

Corporate earnings announcement will gain momentum this week before ending on Wednesday, ahead of the “Merdeka” public holiday on Thursday. Although nothing spectacular is expected out of this earnings season, it should be in-line with the consensus expectations for the 30 FBMKLCI component stocks to register an average earnings growth of between 8% and 10% in this calendar year and next, reinforcing the view that the benchmark index is attractive trading at CY24 price-to-earnings ratio of 12.8x. This should act as a stronger support for the FBMKLCI as it goes through a consolidation phase, pending clarity on policy direction and growth measures locally and abroad.

In the Jackson Hole meeting last Friday, the Fed chairman Jerome Powell’s reiterated his hawkish view that additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy. However, the US equity markets took the news in stride, focusing on the positive aspect of his speech that pointed to a stronger-than-expected economic growth, and continued to expect Fed to stay pat in its September meeting. The CME FedWatch Tool showed 80% probability of Fed maintaining interest rate next month but the probability of a rate hikes increased to 55.5% in November from 20% in September. The core personal consumption expenditure for July and labour market data for August this week should reinforce the hawkish view. Consensus forecast showed PCE and core PCE rising 3.3% and 4.2% YoY. Actual data may not deviate much as the Fed chairman has already indicated that the Fed’s favourite inflation measure rose 3.3% YoY last month.

In China, the government’s slow reaction to counter increasing signs of economic weakness should continue to unnerve investors. Its July industrial profits, which was revealed yesterday, showed profits from firms with annual revenues of at least 20 million yuan from their main operations fell 6.7% YoY versus 8.3% YoY in June as demand remained weak. The Purchasing Managers’ Indices for August that will announced this Friday are expected to highlight sustained weakness amid soft domestic and external demand. This should indicate continued weakness in industrial profits.

Source: TA Research - 28 Aug 2023