Market Consolidation Ahead of the Fed Meeting

The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) whipsawed lower last week on the back of a sharp correction on Wall Street, triggered by the lower-than-expected earnings reports from major US technology heavyweights, which forced investors to adjust their expectations lower. Sector-wise, construction, property, telco and oil & gas heavyweights bore the brunt of the profit-taking and selling pressure, given their near-term stock price outperformance.

Week-on-week, the FBM KLCI slumped 23.67 points, or 1.45 percent, to 1,612.88, as moderate gains on Sunway Berhad (+14sen) and Petronas Dagangan (+30sen) were overshadowed by losses in Axiata (-24sen), Press Metals Holdings (-32sen), Nestle (- RM6.60), Mr. DIY (-9sen) and KLK (-86sen). Average daily traded volume last week slowed to 4.65 billion shares versus 5.05 billion shares the previous week, while average daily traded value slipped to RM3.13 billion, against the RM3.77 billion average the previous week.

Foreigners turned net sellers in the local market last week after the US equity markets fell on earnings disappointments from mega cap names. Nonetheless, a recovery in the US equities last Friday and continued easing in the US personal consumption expenditure (PCE) should limit further foreign selling this week and push the FBMKLCI into a consolidation phase as investors await the outcome of US Federal Reserve’s (Fed) meeting and the release of 2Q24 results by market heavyweights like Apple, Microsoft, Amazon and Meta this week. As for stock picks this week, selective banking (CIMB TP:RM7.90, HLBANK TP: RM22.00, MAYBANK TP:RM10.80 and PBBANK TP RM5.05), telco (CDB TP:RM4.64 and TM TP:RM7.70) and construction (GAMUDA TP:RM9.94, INTA TP:RM0.71, KERJAYA TP:RM2.73, SUNCON TP:RM6.15 and WCT TP:RM1.52) counters should again encourage investors to bargain hunt following recent corrections as they look for rebound upside ahead.

The US PCE edged lower to 2.5% YoY in June from 2.6% in May, matching market expectations while the core PCE, the Fed’s preferred gauge of inflation that excludes volatile food and energy prices, rose 2.6% in the same period, matching May's increase but coming in above the market expectation of 2.5%. Still, the CME FedWatch Tool is showing a 100% probability for a rate cut in September despite the stronger core PCE and the advanced estimate of 2Q24 US GDP last week showing an annualised expansion of 2.8% versus forecast 2.0% and 1.4% in the 1Q24. This confidence was probably attributed to the overall Consumer Price Index that eased to 3.0% YoY in June versus 3.3% YoY in May, weakness in the June payroll numbers, which eased to 3-month average gain of 177,000, the slowest pace since January of 2021, and the unemployment rate of 4.1%, which was at its highest level since 2020 and has increased in each of the last three months.

Perhaps, the US central bank already had a glimpse of the July nonfarm payrolls report that will be released this Friday prior to its meeting tomorrow and Wednesday. Market is expecting the payrolls to decline to 175,000 versus 206,000 in June and growth in average hourly earnings to drop 3.7% versus 3.9% YoY, while unemployment rate to remain sticky at 4.1% YoY. Thus, the Fed’s language will be watched closely for clues about an impending rate cut in September. Continued Fed hawkishness and indication of further delays in monetary easing could sustain foreign selling in the local equity market and vice versa.

In China, its faster than expected industrial profit growth of 3.6% YoY in June (0.7% YoY in May) was buoyed by exports as domestic demand remains soft due to weak consumer confidence. Note that China’s exports grew at its fastest pace in 15 months to 8.6 % YoY in June while nationwide retail sales only grew by 2% YoY. This could be attributed to stocking up activities in the US and Europe prior to the enforcement on higher tariff on imports from China. If its Purchasing Managers Indices for July remain above the 50-point growth threshold, except for the manufacturing PMI that is expected to record 49.3 versus 49.5 in the previous month, when announced later this week, it could bolster confidence in China’s ability to retain at least a 5% GDP growth in 2024 GDP after the 2Q24 economic growth of 4.7% YoY disappointed. Both the government and China’s central bank have announced a series of measures after the release of 2Q24 GDP to revive consumption, which holds huge potential if they succeed in tapping the huge 148 trillion yuan in household savings that make a large part of the 300 trillion-yuan deposits in Chinese banks.

Source: TA Research - 29 Jul 2024