The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) rebounded from a selloff to end slightly lower week-on-week, as heightened Middle East geopolitical tensions following Iran’s aerial military strikes on Israel and strong March US retail sales, which reduced the case for interest rate cuts, were offset by bargain hunting amid signs of stability in key regional currencies, as investors reassess the outlook for US interest rates to stay higher for longer. Despite falls in the region following Israel’s cautious retaliatory aerial strike in Iran, gains on oil & gas stocks as the broader market fell managed to lift the index ahead of the weekend.

For the week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) eased 3.47 points or 0.22 percent, to 1,547.57, with gains in Press Metals Holdings (+26sen), MISC (+22sen) and Petronas Chemicals (+13sen) clouded by falls on CelcomDigi (-14sen), Public Bank (-3sen), CIMB (-5sen), Tenaga (-10sen) and Genting Berhad (-17sen). Average daily traded volume last week rose to 4.24 billion shares as compared to 3.77 billion shares the previous week, while average daily traded value climbed to 3.13 billion, against the RM2.46 billion average the previous week.

It was a big relief that Iran did not take the drone attacks by Israel near the central city of Isfahan last Friday seriously and refrained from any retaliatory actions. Confirmation about Israel’s military operations against Iran came from the US officials and not Israel as the latter kept mum about the attack. Besides, news reports said the drones were launched from inside Iran and not directly from Israel, the likely reason for Iran downplaying it as child’s play. In the absence of details, nothing can be concluded about the current tense situation in the Middle East but if Israel is behind it, the attack can be construed as a symbolic message to Iran that its nuclear sites can be targeted at will should the tension escalates.

For now, it appears that the US and Europe have succeeded in containing Israel from attacking Iran directly but the danger of an escalation has not passed as the proxy war can intensify. Iran’s attack on Israel more than a week ago not only invited fresh sanctions against the former by the US and Europe but also resulted in a renewed bipartisan support in the US to approve a USD95bn aid fund to Ukraine, Israel and Taiwan, which are not likely to be taken lightly by Russia, Iran and China, respectively.

As such, looming uncertainties from geopolitical tensions, which also have affected the rate cut narratives by the central banks significantly, will continue to exert downside pressure on financial markets in the coming weeks until there are clear signs that cooler heads will prevail. The purchasing managers’ index, 1Q24 GDP and the core personal consumption expenditure data from the US will be followed closely to gauge the timing of Federal Reserve’s first interest rate cut decision in this upcycle, which many expect to be pushed backward to September versus June or July previously. There are also differing views that the inflationary pressures caused by the geopolitical tensions can also lead to a 25% basis points increase in interest rate amidst the strong US economy and labour market. In the absence of strong leads, the FBMKLCI is expected to continue its sideway trading with foreigners exiting and domestic investors nibbling oil & gas and defensive stocks as a viable trading strategy amidst current geopolitical tension. This was apparent in the continued foreign selling last week and sustained appetite for the oil & gas related stocks and defensive plays in the consumer staple, utilities and healthcare sectors as shown in the following table.

Source: TA Research - 22 Apr 2024