Market Could Trend Sideways This Week After Initial Gain on Monday

Week-on-week, the FBM KLCI added 11.84 points, or 0.73 percent, to 1,635.74, as gains on Petronas Dagangan (+RM1.46), Public Bank (+24sen), Hong Leong Financial Group (+86sen), RHB Bank (+19sen) and Hong Leong Bank (+62sen) overcame losses in YTL Corp (-41sen), CelcomDigi (-22sen) and YTL Power (-23sen). Average daily traded volume last week was slightly better at 3.73 billion shares versus 3.56 billion shares the previous week, while average daily traded value improved to RM3.53 billion, against the RM2.69 billion average the previous week.

The FBMKLCI could take cue from the strong US markets last Friday when it reopens today after the Fed chairman appeased financial markets with his dovish statements. Nonetheless, we expect sideways trading in the remaining days of the week as investors digest the outcome of second quarter results reporting that will end this Friday. That aside, the Ringgit has strengthened to RM4.38 against the USD last Friday versus RM4.438 a week earlier as foreigners continued their net buying of local equities in anticipation of further weakening in the USD and sustained improvement in the Malaysian economy that should have corresponding positive impact on corporate earnings. In fact, last Monday’s net inflow of RM574.9mn was the highest daily inflow since 17 March 2017 when it a high of RM818.7mn. As at last Thursday, the net foreign inflow for the year stood at RM1.54bn.

Expectations of continued strength in the Ringgit should augur well for sectors that depends on domestic sales but have high import content where most of the costs incurred are in foreign currencies, especially the USD. Thus, buying interest in Consumer stocks, especially those in retail and staple products, like AEON (TP:RM1.68), F&N (TP:RM34.97), FFB (TP:RM1.97), FOCUSP (TP:RM1.11), ABLEGLOB (TP:RM2.57), LHI (TP:RM0.71), PADINI (TP:RM4.70), QL (TP:RM7.40) and SCIENTX (TP:RM5.41), Healthcare, DPHARMA (TP:RM1.50), and SCOMNET (TP:RM1.73), and Transportation, PTRANS (TP:RM1.03) should prevail apart from those that will benefit from translation gains due to high borrowings in foreign denominated currencies like TENAGA (TP:RM14.50).

To recap, as widely expected, the Fed chairman Jerome Powell’s comments in the Jackson Hole meeting last Friday reaffirmed the strong possibility of the central bank cutting its interest rate by at least 25 basis points in the September. Powell appeared decisive when he said that the policymakers do not seek or welcome further cooling in the labour market conditions and declared the time has come for policy adjustment. Recall that US unemployment rate has risen to 4.3% in July and triggered the “Sahm Rule” that indicates an economy in recession and the Labor Department has reported that the US economy created 818,000 fewer jobs than originally reported in the 12-month period through March 2024.

With such a strong statement from Powell, it is no brainer that the easing cycle will begin in the next meeting on 17 and 18 September. We regard this as a timely decision before signs of further deterioration in the economy emerge, more so if the easing happens later and involve more than 25 basis points cut, which could revive concerns about a recession and trigger panic reactions. The policymakers are expected to pursue a gradual approach with a 25-basis point cut to between 5.0% and 5.25% and tweak rates further if needed in the November and December meetings. Between now and the next policy meeting, they still have the liberty to review the July Personal Consumption Expenditure data this week and the August nonfarm payroll numbers early next month. Consensus is expecting the core PCE to expand 0.2% MoM for a second month, pulling down the three-month annualized rate to 2.1%, which is closer to the central bank’s 2% goal.

Source: TA Research - 26 Aug 2024