Last Friday’s Sharp Selloff Globally Should Sustain Selling Pressure

The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) whipsawed lower again last week despite rising odds for interest rate cuts in the US due to easing inflation numbers, with a late week selloff triggered by falling global markets on worries weaker-than-expected economic data from the US will signal potential recession ahead. Nonetheless, sentiment was shore up slightly mid-week after the Bank of Japan raised interest rates and China’s Politburo meeting cued the need for economic stimulus.

Week-on-week, the FBM KLCI eased 1.83 points, or 0.1 percent, to 1,611.05, as gains on CIMB (+23sen), Petronas Dagangan (+44sen) and KLK (+44sen) were overshadowed by losses in YTL Corp (-31sen), Sunway Berhad (-22sen), YTL Power (-23sen) and Nestle (- RM5.40). Average daily traded volume last week eased to 4.3 billion shares versus 4.65 billion shares the previous week, while average daily traded value was at RM3.3 billion, against the RM3.13 billion average the previous week.

Investors are expected to turn cautious today, mirroring the weak performance of the US and European markets, and wait for more clues from the external front before deciding on their next move. Last Friday, the Dow Jones Industrial Average plunged 610.71 points, or 1.51%, to finish at 39,737.26, the S&P 500 lost 1.84% to end at 5,346.56, while the Nasdaq Composite fell 2.43% to close at 16,776.16 on worries that the US economy could possibly heading into a recession. Focus will be on the state of the US economy after the July nonfarm payroll data disappointed, China’s trade and inflation data, and worsening geopolitical situation in the Middle East that could lead to a full-scale war among the global military superpowers. Thus, interest in domestic players like the lower liner construction stocks could resurface, while nibbling continues in the oil and gas stocks that will benefit from the robust outlook for crude oil amid the geopolitical tension and the resilient global economy. Technology players may benefit as well with the US rate cut expectations contributing to the possibility of an oversold rebound in the US technology stocks.

The US nonfarm payrolls rose by 114,000 in July, lower than the 179,000 increase (revised from 206,000) recorded in June and fell short of the market expectation of 175,000. The weaker expansion on the back of a slight 0.1%-point uptick in labour force participation rate to 62.7% led to a higher unemployment rate of 4.3% in July versus 4.1% a month earlier. Similarly, the average hourly earnings declined as well to 3.6% from 3.8% in the same period. Collectively, the easing in labour data raised fears about the US economy falling into a recession as it triggered the so-called “Sahm Rule”, which states that when the unemployment rate over a three-month period averages half a percentage point above the 12-month low, the economy is in recession. The jobless rate rose to 4.3% in July, bringing the three-month average to more than 4.1%, compared to the 12-month low of 3.5%. Nonetheless, this rule is not cast on stone and should be taken with a pinch of salt as the Federal Reserve still has room to manoeuvre with the high interest rate ranging between 5.25% and 5.50%.

Besides, the continuously inverted yield curve (difference between the 2 and 10-year yield) since July 2022 has been indicating the same possibility ever since but the economy did not succumb to recessionary pressures due to the resilient labour market, consumers dipping into their savings and liquidity support from the central bank. Nonetheless, with the latest labour data alluding to the near certainty of a rate cut in September, the question now is whether it would be 25 or 50 basis points. The stronger possibility of a rate cut in September has reduced the yield differential between the 2 and 10-year treasury substantially by 83 and 57 basis points in the last one month to 3.88% and 3.79%, respectively as at last Friday.

China’s July trade data this Wednesday is expected to show exports and imports growing at a faster clip of 10.0% and 3.3% from June’s 8.6% and -2.3% YoY, respectively leading to a slight uptick of USD1bn in trade surplus to USD100.1bn. Meanwhile, this Friday’s announcements on its July producer and consumer price indices are not expected to deviate much from the -0.8% and 0.2% YoY a month earlier. Consensus data is showing a contraction of 0.9% in factory gate prices while consumer inflation remains tepid at 0.3%. These weak price points could increase expectations for China to hasten its policy measures to boost consumption to deliver its projected 5% economic growth this year.

Tensions in the Middle East have flared up after Israel killed Hamas leader Ismail Haniyeh and a Senior Hezbollah commander Fouad Shukur as a reaction to a rocket attack in Golan Heights that killed 12 children. Iran has vowed to retaliate and is determined to punish Israel with greater force. The US, Israel’s ally, has already ordered additional ballistic missile defense-capable cruisers and destroyers to the Middle East to help defend Israel from possible attacks by Iran and its proxies. A worsening situation could prompt investors to move into haven assets and away from equities.

Source: TA Research - 5 Aug 2024