Expect a Healthy Consolidation

The local blue-chip benchmark index touched a 14-month high last week, prior to profittaking correction triggered by overbought momentum and recent strong gains, which encouraged market players to reduce trading commitments. Stocks continued to range bound and attempted to rebuild support and further ease overbought momentum ahead of the weekend, as investors awaited the US December producer inflation data and key corporate earnings for leads.

Week-on-week, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) ended flat at 1,487.34 (-0.27), with gains from YTL Power (+46sen), YTL Corp (+14sen), Sime Darby (+10sen) and TM (+12sen) countered by falls on Petronas Chemicals (-28sen), CIMB (-8sen), Tenaga (-16sen) and Public Bank (-3sen). Average daily traded volume last week stayed elevated at 5.42 billion shares, compared to 5.88 billion shares the previous week, while average daily traded value rose to RM3.33 billion, against the RM3.17 billion average the previous week.

The FBMKLCI is expected to go through a healthy consolidation this week while waiting for positive news flows from abroad and locally after last week’s December inflation data in the US pointed to a likely delay in the monetary policy easing, unabated deflationary pressure in China increased expectations for a more aggressive policy interventions ahead of the National People’s Congress on the 5th March, and the meeting between the prime ministers of Malaysia and Singapore last week fortified hopes for greater cooperation on the socioeconomic front and infrastructure development, especially in Johor, which will be strengthened further by the ascension of the new King on 31st January.

Cautious mood in the immediate term could also drive the consolidation phase, with buying support from local institutions, after attacks by the UK and US task force on Houthi controlled installations in Yemen invoked concerns about stronger retaliations that could destabilise the Middle East and boost energy prices. Brent crude oil has regained some momentum after the strikes and closed above the USD78/barrel last week and could retest the USD93/barrel level last seen after the Hamas attack on Israel in October 2023. While this could revive buying interest in domestic oil and gas stocks, an escalation in this conflict will also contribute to inflationary pressure and delay interest rate cut expectations in the US. The Beige Book report this Wednesday should provide more clues on the current US economy and policy direction.

All eyes will be on China central bank’s decision today on the 1-year Medium-Term Lending Facility Rate after deflationary pressures sustained a decline in consumer prices for third straight month in December, the longest streak since 2009, while exports posted its first annual decline in seven years. Consensus is expecting a 10-basis point cut to 2.4% in the loan rate. Besides, China is also due to announce other important economic data this week, which include the fourth quarter gross domestic product (GDP) that is forecast to grow by 5.2% YoY versus 4.9% YoY in the third quarter, and the industrial production (6.8% YoY) and retail sales (8.0% YoY) for December.

Locally, the trade data for December and the Statistics Department’s advance estimate of Malaysia’s fourth quarter GDP are due this Friday. Last week’s Industrial Production Index (IPI) for November that showed an expansion of 0.6% YoY, following October’s 2.4% YoY, provided a glimmer of hope for the fourth quarter GDP to come in at 4.3% YoY based on consensus forecast (TA Research:4.7%) versus 3.3% YoY in the third quarter. To recall, the IPI contracted by -0.04% in the third quarter, a notable decline from the +12.2% recorded in the same quarter in 2022. Meanwhile, consensus is expecting the year-on-year contraction in exports to narrow further to -2.8% in December from -5.2% in the first two months of the fourth quarter.

Source: TA Research - 15 Jan 2024