The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) underwent choppy trade last week. The banking stocks climbed on continued foreign fund purchases but concerns over a sharp slowdown in the US economy due to the weak August jobs data raised worries over slower growth while China continued to dampen sentiment with weaker economic growth prospects and deflation fear. Nevertheless, investors returned to bargain hunt select oil & gas, technology, plantation and consumer heavyweights ahead of the weekend, amid hopes the recent ECB and imminent US interest rate cuts ahead would support a soft landing for key global economies.

For the second week of September, the FBM KLCI eased 0.97 of a point to 1,652.15, with gains on YTL Power (+14sen), Sunway Berhad (+15sen) and CIMB (+27sen) were offset by losses in Mr. DIY (-9sen), Petronas Dagangan (-54sen), IOI Corp (-10sen) and KLK (-50sen). Average daily traded volume last week stabilized at 2.97 billion shares versus 2.98 billion shares the previous week, while average daily traded value was at RM3.33 billion, against the RM3.07 billion average the previous week.

We anticipate the FBMKLCI to trade sideways in this shorter four-day trading week as the weak selling momentum following the recent profit-taking corrections alludes to market consolidation while waiting for the Federal Reserve’s “language” in its upcoming meeting today and tomorrow to gauge the situation in the US economy. Bargain hunting interest should emerge from sidelined investors who are willing to commit fresh funds for recovery gains ahead after the meeting if the Fed cut interest rate as widely expected and alludes to a soft landing in the US economy. In our view, the lower liner construction and oil & gas counters, which have suffered sharp profit-taking corrections, should begin to attract bargain hunters again given their much cheaper entry levels for rebound upside ahead.

Probability of a first rate cut since 2020 in this US interest rate upcycle remained ahave00% compared to a week ago based on the CME FedWatch Tool forecast but expectations for a 50-basis point cut has increased to 50% from 30% last Saturday, making the odds even between a 25-basis point and 50-basis point cut. Based on the financial market observations, the US equities, which bounced back from each selloff, appeared to be more convinced about the prospects of a soft landing compared to the bond market that expects the benchmark rate hitting about 275 basis points (26.3% and 23.2% probability of between 2.75-3.00% and 2.50–2.75%, respectively) by end-2025. As the Fed has only two more meetings left after September and meets eight times in a year, the latter is effectively pricing in at least a quarter-point rate cut each over ten sessions. Such a bearish reaction by the Fed could only be possible during a recession. Thus, with such a diverging view, it will not be surprising for financial markets to be more volatile in the coming months if economic data remains mixed and the Fed continues to thread a measured middle path.

China’s lack of strong commitment to reinvigorate its weakening economy is also a cause for concern after the August industrial production, retail sales, fixed asset investment and unemployment rate last Friday underperformed market expectations and turned softer than July. With its recent weak consumer inflation and factory gate prices sustaining concerns about deflationary pressures, all eyes will be on its central bank’s decision on loan prime rate this Friday. Although the market is not expecting any cuts in its 1-year and 5-year loan prime rate of 3.35% and 3.85%, respectively, a surprise cut will be a much-needed boost that could lift market sentiment.

Locally, the focus will be on August trade data. No doubt, Malaysia’s trade data remained robust in the first seven months as it grew by 9.8% to RM1.7tn. In July, it surged 18.3% YoY, the fastest rate in 21 months, to RM255.9bn, marking the highest trade value since October 2022. During the month, exports continued its upward trajectory for the fourth consecutive month, expanding by 12.3% to RM131.2bn while imports increased by 25.4% to RM124.7bn. The trade surplus amounted to RM6.4bn, marking the 51st consecutive month of surplus since May 2020. While we remain optimistic about an improvement in trade performance in 2024, the rising trade deficit with China can be become a concern if the shortfall is not cushioned by rising exports to other destinations fueled by rising demand and broader application of “China Plus One” strategy. To recap, trade deficit with China reached RM12.2bn in July 2024, up from RM8.4bn in June 2024. Malaysia has consistently registered trade surpluses with the US and Singapore and witnessed notable increase in the import of intermediate goods from December 2023 to July 2024. Hopefully, this translates into higher demand for finished goods and reflected in the trade data this week and is consistent with our full year exports and imports growth forecasts of 7.0% and 10.6%, respectively versus 5.1% and 15.5%, respectively in the first seven months of 2024.

Source: TA Research - 17 Sept 2024