Alternating profit-taking and bargain hunting interest forced the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) into a narrow range bound consolidation during the last trading week for the month of June and first-half of the year. Profit-taking corrections in utility, property, construction and oil & gas stocks were cushioned by mild bargain hunting interest in healthcare and telco heavyweights.

For the last week of June, the FBM KLCI ended flat at 1,590.09 (-0.28), as gains on Sime Darby (+6sen), IHH Healthcare (+12sen) and CelcomDigi (+7sen) were overshadowed by falls in YTL Power (-26sen), Sunway Berhad (-14sen), YTL Corp (-13sen) and Petronas Chemicals (-15sen). Average daily traded volume last week slowed further to 4.7 billion shares as compared to 5.59 billion shares the previous week, while average daily traded value shrank to RM3.38 billion, against the RM4.42 billion average the previous week, as the absence of significant end first-half window-dressing interest discouraged firmer investor commitments.

The FBMKLCI is expected to remain in consolidation phase this week with local funds cushioning persistent foreign selling and investors waiting for more catalysts to break free from current listless trading. Selective construction, oil & gas and technology related counters should attract bargain hunters anticipating recovery potential ahead.

Foreign selling could persist this week as the speculations about the timing of Federal Reserve’s first cut in this interest rate upcycle continues and investors watch closely the uncertain US politics after a first debate between president Joe Biden and former president Donald Trump last Thursday showed the latter may have an upper hand over incumbent due the former’s subpar performance. No doubt, last Friday’s inflation data was positive as it came largely within market expectations but it did not move the needle after the University of Michigan consumer sentiment index for June came in higher than expected, rising to 68.2 from the preliminary reading of 65.6. Meanwhile, the one-year inflation outlook fell to 3%, lower than forecast 3.2% and 3.3% expected in May.

Both the latest PCE and core PCE, Fed’s favourite inflation gauge, for May that was released last Friday showed some easing to 2.6% YoY from 2.7% YoY and 2.8% YoY respectively, which was in line with market expectations. This marked the lowest annual rate since March 2021, which was the first time in this economic cycle that inflation topped the Fed’s 2% target. On a MoM basis, PCE was flat but core PCE rose 0.1%. Post this announcement, the CME FedWatch Tool data showed a 64.1% probability for Fed to cut interest rate in September, which was lower than the 65.9% a week earlier.

If the Fed continues delaying rate cuts, it can be bane for the US economy if businesses and consumers tighten their belts to compensate for the high borrowing cost. A hard landing in the US economy is not good for global trade. Continued delays in the US rate cut while the rest of the world are looking at easing could depreciate other currencies and exert inflationary pressure. As such, focus will turn to the Fed’s June meeting minutes and US labour data, which is contributing to the strong consumption, later this week.

While we expect Bank Negara Malaysia to maintain its policy rate in 2H24 to accommodate economic expansion, inflationary pressures are expected to rise in the period due to costpush factors after the recent subsidy rationalisation measure involving diesel prices. If the Ringgit maintains its weakness against USD, imported inflation will remain a sore point and investing in the US may seem more attractive. Currently, we expect Malaysia’s consumer price index to double to 4.3% YoY in 2H24 versus 2.1% YoY in 1H24, adding up to a full year growth of 3.3%. High inflation correlates with a weaker currency and this will delay any prospects of a stronger rally in the FBMKLCI as the local bourse needs robust foreign buying to retest its previous highs.

Meanwhile, China’s official Purchasing Managers’ Indices for June that came out yesterday were also not very convincing about China’s economic growth trajectory although both the composite PMI and non-manufacturing PMI came above the 50-point threshold at 50.5, down 0.5 and 0.6 percentage points, respectively from the previous month. The PMI for manufacturing sector remained at 49.5. This raised expectations for more policy support in this quarter, which can come in the form of government support or reduction in interest rate and reserve requirement ratio by Bank of China.

Source: TA Research - 1 Jul 2024