Further Correction Ahead of Budget 2024

Further profit-taking in key utility, plantation, property and construction stocks last week dragged the local blue-chip benchmark index down to the lowest in more than two months, while most investors were sidelined amid Budget 2024 tax uncertainties, and global growth and inflation worries. Market sentiment was also clouded by regional falls after strong US job openings in August raised fears the Federal Reserve will keep interest rates higher for longer to tame inflation, and investors remain sidelined ahead of the US non-farm jobs report for more signs on the inflation risk for the US economy.

For the first week of October, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) eased 7.29 points, or 0.5 percent, to 1,416.88, with minor gains in RHB Bank (+7sen), Tenaga (+3sen) and AMBank (+4sen) overshadowed by falls on Public Bank (-3sen), PPB Group (-56sen), Axiata (-8sen), Dialog Group (-7sen) and CelcomDigi (-7sen). Average daily traded volume last week declined further to 3.05 billion shares, compared to 3.12 billion shares the previous week, while average daily traded value was at RM2.12 billion, against the RM2.09 billion average the previous week.

Barisan Nasional’s victory in retaining its Pelangai state seat in a by-election and the last Friday rebound in the US markets, despite a strong jobs report for September, could provide some support for the FBMKLCI as the market reopens today. Nonetheless, the downside bias remains ahead of Budget 2024, foreign selling and uncertain macro factors. As highlighted in the last two weeks, market sentiment is expected to remain fragile until the tabling of Budget 2024 in parliament this Friday. Any new taxes that affect trading of listed shares and corporate earnings will be viewed negatively and vice versa.

In the US, the Dow Jones Industrial Average gained 288.01 points, or 0.87%, to close at 33,407.58, the S&P 500 added 1.18% to 4,308.50, and Nasdaq Composite rose 1.60% to 13,431.34 last Friday as investors found excuse in the slightly lower wage growth to brush off a much stronger than expected increase in the non-farm payrolls. The average hourly earnings rose 4.2% year-on-year (YoY) last month, the smallest gain since June 2021, versus 4.3% in August while the payrolls increased by 336,000 jobs against Bloomberg forecast of 170,000 and 187,000 in August.

It reaffirmed the strength of the labour market after the monthly Job Openings and Labor Turnover Survey last week showed vacancies at US businesses rose by almost 700,000 to 9.6 million jobs in August. This confirmation should rekindle worries about the Federal Reserve hiking interest rate again in November and keeping its options open for more rate hikes next year. No doubts, these concerns are already visible in the bond market after the June meeting when the Fed guided for high interest rates for a prolonged period. Nonetheless, its more hawkish statements after the September meeting contributed to the strong correction in bond prices that pushed up the 10-year yield to a high of 4.887 last week before closing at 4.795 on Friday.

Concerns about the tight US labour market rekindling inflationary pressure, amid persistently high oil price, and the Federal Reserve hiking interest rate in November could resurface after the temporary reprieve last Friday, triggered by the Hamas’ devastating attack on Tel Aviv last Saturday as a retaliation to previous Israeli air strikes, raids inside West Bank cities and violence at Al-Aqsa. With Israel vowing to strike back with full vengeance and countries like Iraq, Iran, Syria, Qatar and Lebanon showing support for Hamas, the escalation of tension in the Middle East risks pushing up oil prices again and prolonging the negative impact on inflation. Brent crude oil has retreated from its September high of approximately USD95/barrel to around USD84/barrel last Friday. There could be a kneejerk reaction today following the attack but the risk of prices remaining high for long is there if the war escalates and prolongs. Meanwhile, the CME FedWatch Tool last Friday showed only a probability of 27.1% for a rate hike in November Fed meeting but that could rise quickly if the tense situation in the Middle East intensifies. That aside, investors also will be watching closely the details of the Federal Reserve’s meeting minutes last month, and the US consumer price index for (CPI) September that will be released this Thursday. China’s trade and CPI data for September will also be in focus this week.

Source: TA Research - 9 Oct 2023

Source: TA Research - 9 Oct 2023

Source: TA Research - 9 Oct 2023

Source: TA Research - 9 Oct 2023