Further Catalysts Needed to Sustain Positive Momentum

The local stock market began trading last week on a cautious note as investors were sidelined amid concerns over worsening of the Israel/Hamas conflict, and ahead of key central bank meetings and economic data releases. However, sentiment turned better towards the weekend, in line with the region on hopes the US Federal Reserve may be done with interest rate hikes after pausing, which could extend till year end and encourage Bank Negara to also stay pat on interest rates. The passing of the Supply Bill 2024 for next year’s budget by the Dewan Rakyat at the policy stage in parliament on last Friday provided further boost for the benchmark index to close the week on a positive note.

For the week, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) gained 8.03 points, or 0.56 percent to 1,449.93, as gains in Sime Darby Plantations (+14sen), CIMB (+5sen), Tenaga (+10sen), CelcomDigi (+8sen) and Maybank (+4sen) offset falls in Petronas Chemicals (-11sen) and Nestle (-RM2.30). Average daily traded volume last week mildly improved to 3.12 billion shares, compared to 3.02 billion shares the previous week, but average daily traded value stayed low at RM1.82 billion, against the RM1.88 billion average the previous week, as underlying caution prevailed.

The local equity market should take cue from the stronger US markets last week, which shrugged off geopolitical tensions and closed higher after the Federal Reserve maintained its fund target rate at 5.25% to 5.50% for a second consecutive month. The Dow Jones Industrial Average rose 1,643.73 points, or 5.07% to close at 34,061.32, the S&P 500 gained 5.85% to 4,358.34, while the Nasdaq Composite Index surged 6.61% last week to finish the session at 13,478.28 as investors turned positive after the Federal Reserve’s rate decision last Wednesday.

It was supported further by the October labour data two days later. The fact that the nonfarm payroll of 150,000 came lower than expected 180,000 and much weaker than September’s 297,000, and the average hourly earnings continued to dip to 4.1% YoY from 4.2% YoY in the previous month should continue to lend credence to the belief that the central bank is done with its rate hike cycle and would be leaning towards easing in the second half of next year to prevent a sharper deceleration in the economic activities. The sustained weakness in the 10-year treasury yield that trended lower to 4.577% last Friday reflected this mood.

While this optimism is warranted to cushion shocks in the global financial markets amid the ongoing conflict between Israel and Hamas, such confidence could be tested if the tensed situation in Gaza cannot be contained. With Israel’s ground offensive gaining traction, Yemen’s Houthi rebels joining the war against Israel, and countries like Jordan and Libya recalling their ambassadors from Israel and pressure mounting on other Middle Eastern countries to follow suit, there is a growing risk of an escalation in tension.

As far as the local equity market is concerned, it appears to maintain a cautious stance and driven by news flows in view of the geopolitical tension, weak global trade and higher operating/living costs that were compounded further by the persistent weakness in Malaysian ringgit, which has dwindled to RM4.7292 against the USD last Friday. As such, investors would be watching closely the inflation and trade data from China, Malaysia’s largest trading partner, this week. Sustained deflationary pressure in its consumer and producer price indices, and a weaker-than-expected trade data will continue to cast doubts about the efficacy of the government’s economic revival measures and dampen investor sentiment. A better outcome should support the positive momentum seen in the FBMKLCI in the last two trading days and contributes to further gain.

The endorsement of Budget 2024 at policy stage last week is also a good sign that it should not face any hurdle during the 12-day debates at the committee level that will begin today. Successful passage of this budget is not only crucial for the timely implementation of government measures to boost domestic activities amid slower external demand, but also instil confidence among foreign investors, who have been trickling in last week after turning net sellers in October (- RM2.2bn vs. –RM4.1bn in 10M23), about the country’s political stability.

Source: TA Research - 6 Nov 2023