FBMKLCI Could Enter a Healthy Consolidation

Following the Wesak Day religious holiday last week, sustained foreign buying interest in key construction, technology and oil & gas heavyweights managed to lift the local blue-chip benchmark index to another fresh high in more than three years. However, concerns about elevated inflation sustaining a higher-for-longer monetary policy and uncertainty over the path for the U.S. interest rates sparked profit-taking correction in the US, which spilled over into the region and domestic equity markets ahead of the weekend.

For the week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) added 2.78 points or 0.17 percent, to 1,619.40, as gains in Tenaga (+50sen), TM (+31sen), CIMB (+7sen) and Press Metals (+14sen) offset falls in YTL Power (- 44sen) and YTL Corp (-14sen). Average daily traded volume last week climbed further to 6.04 billion shares as compared to 5.74 billion shares the previous week, while average daily traded value rose to RM4.46 billion, against the RM3.95 billion average the previous week.

Recurring concerns about the US Federal Reserve delaying its rate cut decision could contribute to a healthy profit taking consolidation in the local equity market this week. Investors are expected to pause on their buying decisions and take profit on the significant rally that has pushed up the benchmark index by 164.74 points year-to-date. This echoes last Friday’s mood after the minutes of Fed’s April meeting showed a growing consensus about the need to wait for more confirmation that the inflation is cooling enough to warrant a rate cut.

According to the FedWatch Tool, the market is not expecting any rate cut this summer and even the rate cut probability in September has fallen to 45.4% last Saturday versus 64.8% a week ago after the Fed’s meeting minutes was released. While the probability for a cut in November and December is higher at 61.6% and 81.5%, it has dropped from 77.2% and 89.7%, respectively a week ago and investors are forecasting minute chances for it to rise by 0.5%, 0.3% and 0.2% in those respective months now, versus none previously. Thus, the Fed beige book and the second reading of the US 1Q24 GDP this Thursday and the core personal consumption data for April this Friday will be followed closely for more clues on the monetary easing decision.

On China front, its industrial profits and purchasing managers’ indices for April and May, respectively that will be released this week could draw market attention while investors watch closely the mounting tension in Taiwan Strait after the People’s Liberation Army of China said last Friday that its military drills around Taiwan are designed to test its ability to “seize power” over the island. Besides, a joint communique issued by the finance chiefs and central bank governors of the Group of Seven countries (G-7) last Saturday adds to the uncertainty. The G-7 expressed concerns about China's industrial overcapacity, the desire to take appropriate measures to create a level playing field and the intention to submit the necessary proposals to their leaders for consideration ahead of the G-7 summit next month. The proposals will also include measures to keep supporting Ukraine by using profits from Russian assets that have been frozen. This will not be taken lightly by Russia.

Thus, geopolitical tensions could rise as we head into June. In the absence of any immediateterm catalysts, investors might finally consider the relevance of the adage “Sell in May and Go Away” this week. Hopefully, the ongoing 1Q24 results reporting season that will enter its final stage this week will provide more reasons to increase exposure in local equities. Of the 54 from 105 companies under our coverage that have reported results so far, 61% came within, 20% below and 19% above expectations. Most blue chips from the banking, telco, power and utilities sectors will be announcing their results this week.

Source: TA Research - 27 May 2024