The local stock market extended sideways trading last week, as a relief rebound after China approved a trillion-yuan bond issue to help stimulate its domestic economy failed to spillover and address worries over the Israel/Hamas conflict deadlock and persistently high interest rates and inflation. Investors were hesitant to commit with the US Treasury yields surging back to indicate interest rates could stay high for a prolonged period.

Week-on-week, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) edged up 0.86 points, or 0.06 percent to 1,441.04, as gains on CIMB (+6sen), Public Bank (+3sen), Petronas Chemicals (+10sen) and Tenaga (+5sen) overcame falls in Axiata (-12sen), CelcomDigi (-9sen) and Maxis (-5sen). Average daily traded volume last week declined further to 3.02 billion shares, compared to 3.15 billion shares the previous week, while average daily traded value shrank to RM1.88 billion, against the RM2.09 billion average the previous week.

The FBMKLCI could mirror the US markets’ last Friday performance when it reopens today. The Dow Jones Industrial Average fell 366.71 points, or 1.12% to close at 32,417.59, while the S&P 500 slipped 0.48% to finish the session at 4,117.37 last week as investors continued to dump equities on fears of a recession. The high US bond yields also made equities less exciting amid disappointing US corporate earnings last week. Market sentiment is expected to remain fragile this week and the benchmark FBMKLCI could continue its range-bound trade pending clarity on the US Federal Reserve next move in this week’s meeting, unhealthy developments in the Middle East following the conflict between Israel and Hamas, and the ongoing third quarter results reporting season for companies listed on Bursa Malaysia.

The US Fed chair Jerome Powell has indicated recently that the central bank is inclined to hold rates steady in its next meeting while leaving open the possibility of a future hike if the economy continues to be resilient and inflation remains high. Based on the CME FedWatch Tool, chances for a rate hike in the November meeting is almost nil with the probability for target rate to remain between 5.25% and 5.50% is high at 99.9%, but it weakens to 80.1% in December. The fact that the US core personal consumption expenditure continued to weaken to 3.7% YoY in September against 3.9% YoY in August, and the 10-year Treasury yield remained high at 4.845% last Friday could prompt the Fed to hold interest rate steady in this week’s meeting despite the economy expanding at a stronger pace of 4.9% in third quarter versus an expected 4.7% YoY. The nonfarm payroll and other labour data for October that will be released this week should support the view that the labour market is cooling and the pressure on core inflation is easing gradually.

Besides, the US bond yield could remain high in the short-term given the likelihood of an increase in supply of US Treasuries to fund the growing fiscal deficit, which will increase further because of funding for the ongoing Israel-Hamas conflict, and waning demand. The Biden administration has requested from Congress a USD106bn allocation for military and humanitarian aid for Israel and Ukraine, and humanitarian aid for Gaza. The US will provide more update on its debt issuance plans this Wednesday.

That aside, the tense situation in the Middle East is not easing as Israel has increased the ground and air offensive in the Gaza strip last week and has rejected the United Nation’s demand for a humanitarian truce. Meanwhile, Iran has warned the US that it will not be spared from the repercussions if the genocide in Gaza continues with its undivided support for Israel.

On the local front, Bank Negara Malaysia is expected to retain its Overnight Policy Rate at 3.00%, amid the low inflation rate of 1.9% YoY in September, when it meets this Thursday.

Source: TA Research - 30 Oct 2023