The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) drifted sideways last week, as it digested the ongoing geopolitics tensions between Israel and Palestine that casted uncertainty over the Middle East's geopolitical stability and impacted global financial markets. The conflict has also jolted oil markets, adding to uncertainties already hanging over the global economic outlook. Separately, resurgent worries about the rising US bond yield and possibility of more future interest rates hike by global central bankers also dented investor appetite for stocks last week.

For the week, the FBM KLCI eased 3.10 points, or 0.21 percent to 1,441.04, with gains on PPB Group (+76sen), KLK Kepong (+60sen) and Nestle (+RM3.90) were clouded by falls in Tenaga (-20sen), Public Bank (-3sen), Petronas Chemical (-15sen) and CelcomDigi (-9sen). Average daily traded volume last week slowed to 3.15 billion shares, compared to 3.17 billion shares the previous week, while average daily traded value was RM2.09 billion, against the RM1.96 billion average the previous week.

Negative developments in the external markets are expected to sustain cautious trading sentiment in the local scene this week, with concerns over the ongoing Israel and Hamas conflict and the US monetary tightening acting as key dampeners. Buying support from the local funds has kept the FBMKLCI relatively stable in October despite the attack on Israel by Hamas, but foreign selling has increased last week, contributing to a net outflow of RM1.7bn so far in October. The downside pressure from foreign selling is likely to persist this week with Israel stepping up aerial strikes over Gaza in preparation for a likely ground attack.

The fear of this conflict escalating and attracting direct confrontation from Lebanon, Syria and Iran will remain as the key near term dampener. Under such scenario, the supply chain problem that we witnessed during Covid-19 will recur leading to skyrocketing inflation while causing other socio-economic problems. The sheer blockade of the Straits of Hormuz, the world’s most important oil shipping lane, by Iran alone, as punishment against the US and Europe, can cause significant negative impact on the supply chain and inflation.

Global financial markets were already unnerved by the US Federal Reserve chairman’s remark last week after he said inflation is still too high. Expectations of further interest rate hike have caused the 10-year treasury yield to cross the 5% mark for the first time in 16 years last Thursday before falling back on Friday. Nonetheless, the onset of another war and the US involvement will increase the “term premium” for the bond as the government debts to finance the war increase. The rise in crude oil prices in this backdrop of geopolitical tension will affect the core inflation as well as it trickles down to affect the prices of goods and services in the supply chain. Thus, the impending release of US core personal consumption expenditure data for September later this week may not excite the market even if it falls below the 3.9% YoY in August or turn out to be better than the expected 3.7% YoY. Meanwhile, the raft of third quarter earnings announcements from the US corporates this week could act as a support, if they exceed expectations.

Locally, the Department of Statistics Malaysia released its advanced projection for the country’s third quarter GDP last Friday, its first attempt to meet the demand for timely macroeconomic statistics and to be in line with the best practices in developed countries. It grew by 3.3% YoY due the favourable performance of the services sector (+5.1% YoY), driven by the wholesale & retail trade, transportation & storage and business services subsectors. Construction expanded at a moderate pace of 5.8% YoY while agriculture grew by 0.8% versus -1.1% in the second quarter of 2023. Mining and quarrying continued to contract at -0.1% YoY due to lower production while manufacturing also declined at the same pace (versus +0.1% in 2Q23) due to weaker external demand for electrical, electronics and optical products, as well as petroleum, chemical, rubber and plastic products. The 3.9% YoY growth in the first nine months are consistent with the government’s full year forecast of 4.0%. Bear in mind that the strong 14.2% and 7.0% YoY growth in 3Q22 and 4Q22, respectively act as a high base that compounds the challenges faced by policymakers and businesses to outperform market expectations amid current uncertain external environment. Thus, we need more domestic drivers to cushion the external weaknesses, which could show some improvement in 4Q23 if China continues with measures to revive its slowing economy.

Source: TA Research - 23 Oct 2023