Fed Narratives Should Continue to Dictate Market Direction

The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) climbed to a fresh one-month high in the first week of the second half of this year, led by utility, energy and consumer heavyweights, as upbeat regional manufacturing data and optimism over interest rate cuts after the US Federal Reserve Chairman signalled easing inflation boosted market sentiment. Renewed buying interest in rubber glove stocks highlighted retail interest, but the broader market fell into profit-taking consolidation ahead of the long three-day weekend holiday break due to the Awal Muharram religious holiday.

For the first week of July, the FBM KLCI surged 20.93 points, or 1.32 percent, to 1,611.02, as gains in YTL Corp (+32sen), Sunway Berhad (+33sen), YTL Power (+41sen), Press Metals Holdings (+20sen), Tenaga (+44sen) and MISC (+26sen) overcame falls on telco operators CelcomDigi (-13sen), Axiata (-8sen) and Maxis (-9sen). Average daily traded volume last week stabilized at 4.76 billion shares versus 4.7 billion shares the previous week, while average daily traded value improved moderately to RM3.5 billion, against the RM3.38 billion average the previous week.

Locally, Bank Negara’s policy meeting and the industrial production index for May this Thursday and Friday, respectively are two important events for this week. The central bank is expected to maintain the Overnight Policy Rate in support of the economy. The fact that inflation is likely to fall within its expected range of 2.0% to 3.5% this year (TA:3.3%) could be another important reason for the policy accommodation besides the likelihood of rate cuts in the US contributing to Ringgit’s recovery, which will ease the pressure on the currency and imported inflation.

On a related note, investors will be on the lookout for more clues from the US Fed chairman Jerome Powell during his two days of Congressional testimony today and tomorrow after his comments last week that the US is back on a disinflationary path triggered positive market reactions. Powell is likely to reaffirm the central bank’s prevailing view that policy makers need more evidence that inflation is slowing before endorsing a rate cut. Although the stronger than expected June nonfarm payroll data of 206,0000 (versus Bloomberg forecast of 190,000 and downward revised May payroll of 218,000 from 272,000) last Friday pointed to a still resilient labour market, investors are hopeful the rising unemployment rate and falling average hourly earnings are telltale signs that could lead to at least two rate cuts this year, beginning September. The unemployment rate has been rising steadily in the last four months, hitting 4.1% in June from 3.8% in March while the 3.9% growth in average hourly earnings was below 4% for the second time this year after recording a similar expansion in April. Thus, the upcoming consumer and producer inflation data this Thursday and Friday, which market expects to show further easing, will be in focus.

On the contrary, investors are expecting China’s June consumer and producer price data tomorrow to show a slight uptick on YoY basis. Such eventuality will be viewed positively by investors to subdue concerns about weak domestic demand and rising deflationary pressure. China is also slated to release last month’s trade data this Friday. Consensus forecast is showing a slight YoY improvement in exports and imports to 8.0% and 2.7% from 7.6% YoY and 1.8% YoY in May, respectively. Sustained weakness could increase expectations for China to undertake more solid measures to revive consumption to achieve its full year economic growth target of at least 5%.

On geopolitics, possibilities of last week’s flare up between Israel and Lebanon’s Hezbollah evolving into a full-fledged war that could affect the whole Middle East region is high. Hezbollah has launched more than 200 rockets and drones targeting Israeli military positions in reaction to the latter’s strike that killed a senior commander of the armed group. Israeli officials said they may go to war in Lebanon if efforts for a diplomatic solution fail. This should sustain strength in crude oil prices, which are already benefitting from the tight supply situation engineered by OPEC+ via its production cuts and improving demand outlook ahead of summer driving season. Thus, Oil & Gas related stocks should continue attracting buying interest this week. Buy COASTAL (TP:RM2.00), MHB (TP:RM0.55), PANTECH (TP:RM1.23) and VELESTO (TP:RM0.33).

This aside, the outcome of French election last week that saw a coalition of leftist parties won the most seats in the parliamentary elections. The New Popular Front, a coalition of parties that includes socialists, greens and far-left France Unbowed, garnered 182 seats in the 577-seat National Assembly, while the party of President Emmanuel Macron and its allies won 163 seats. Marine Le Pen’s National Rally party and its allies, which were leading in the first round of voting, came third with 143 seats. With no absolute majority for any party, France is in unchartered territory. President Macron, who will retain his post until the next presidential election in 2027, is likely to have a meeting with the heads of major political parties to form a coalition government. It is the obvious choice. Otherwise, he must form a “technical” government to run the country or establish a minority government until the next parliamentary election, which is only possible one year after this election. This is another shake up after the recent UK election, where at least the Labour party has gotten a strong absolute majority to rule. Changes in Europe at a time when the US is grappling with growing calls for President Joe Biden to step down from Democratic candidacy in the upcoming presidential election in November add to the global political uncertainty.

Source: TA Research - 9 Jul 2024