CAUTIOUS UNDERTONE SET TO CONTINUE

THE blue-chip FTSE Bursa Malaysia KLCI (FBM KLCI) posted a minor gain last week, helped by the strength of select index heavyweights, but the broader market was largely negative, dampened by corrections in the United States and European markets, elevated geopolitical risk in Saudi Arabia, fears over economic slowdown in China and Italy’s budget woes.

Week-on-week, the FBM KLCI edged up 0.1 per cent to 1,732.14 points, as gains on Nestle (+40 sen), Petronas Dagangan (+30 sen), Genting Berhad (+25 sen) and Hong Leong Bank (+22 sen) offset losses on IHH Healthcare (-22 sen), Axiata (-20 sen) and TM (-19 sen). Average daily traded volume and value last week decreased to two billion shares worth RM2.01 billion, compared to 2.5 billion shares and RM2.5 billion, respectively, the previous week.

The FBMKLCI appeared to have lost steam after rebounding from its recent low of 1,682 on October 11. While external factors mostly dominated the reasons for the U-turn, cautious sentiment is expected to prevail ahead of the 2019 Budget on November 2, especially after investors got hints at what to expect in the review of the 11th Malaysia Plan (11MP) last Thursday.

While the growth targets appeared realistic expectations for the fiscal deficit to remain at last year’s level in 2020 on the back of moderate economic growth do imply deficits this year and next year could be higher, probably at 3.2 per cent and 4.8 per cent respectively.

Potentially higher deficit for next year could be caused by the likely huge tax refunds (RM35.3 billion in total) amid the large revenue gap (about RM23 billion after deducting the expected RM21 billion from Sales and Services Tax) left by the abolishment of Goods and Services Tax.

With just 10 more working days before the budget day, nothing much will change the notion that tough times are ahead as Malaysians, especially the T20 and M40 groups, and businesses could be staring at new taxes to boost government revenue.

Externally, China’s third quarter gross domestic product growth of 6.5 per cent came slower than expected 6.6 per cent and second quarter’s 6.7 per cent. With the nation facing pressure from multiple fronts, investors are hoping the government’s stimulus measures will help revive sentiment and growth prospects.

Separately, the about-turn by the Saudi government in admitting that Khashoggi was killed inside its consulate in Istanbul after discussions turned violent have raised eyebrows.

The act has received condemnation from developed countries and it may culminate into stern actions, including targeted sanctions, against Saudi Arabia.

Technical Outlook

Bursa Malaysia shares fell on Monday as worries over the China-US trade dispute dampened risk appetite. The index fell two points to close at 1,728.74, off an early high of 1,739.32 and low of 1,726.25, as losers edged gainers 532 to 342 on total turnover of 2.02 billion shares worth RM2.02 billion.

Shares eked out slight gains the next day, as mild buying interest in blue chips lifted the FBM KLCI. The local bourse added 8.1 points to close at the day’s high of 1,736.84 as gainers led losers 439 to 339 on a total turnover of 1.52 billion shares worth RM1.61 billion.

The local market managed moderate gains on Wednesday as the overnight Wall Street rally on strong US corporate earnings overshadowed concerns over rising interest rates and global trade tensions.

The FBM KLCI added 3.75 points to close at 1,740.59 as gainers led losers 538 to 275 on improved turnover of 2.02 billion shares worth RM2.08 billion.

Shares fell back the following day, mirroring regional falls after the US Federal Reserve (Fed) showed commitment to tighter monetary policy to keep the economy steady.

The local bourse fell 2.58 points to close at 1,738.01 as losers beat gainers 472 to 338 on total turnover of two billion shares worth RM2.03 billion.

On Friday the local market closed lower ahead of the weekend. It ended 5.87 points down at 1,732.14 as losers thumped gainers 579 to 252 on a turnover of 2.4 billion shares worth RM2.3billion.

Trading range for the benchmark index shrank to 24.67 points last week as index heavyweights consolidated the previous week’s heavy losses.

For the week, the FBM-Emas Index slipped 0.1 per cent to 11,970.52, while the FBM-Small Cap Index shed 0.3 per cent to 13,384.24.

Despite last week’s choppy trade, the daily slow stochastics indicator for the FBM KLCI hooked back up into neutral territory, but the weekly indicator extended its travel south into below neutral ground to mirror the bearish momentum.

The 14-day Relative Strength Index (RSI) indicator eased to a weak reading of 35.10 as of last Friday, while the 14-week RSI indicator flattened to a reading of 40.62 to confirm weak upside momentum.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line showed further deterioration below the mid-point, confirming the previous week’s sell signal on the weekly MACD.

Meanwhile, the 14-day Directional Movement Index (DMI) trend indicator remained negative with the +DI and -DI lines expanding negatively, suggesting further bearish trend ahead.

Conclusion

Given the weak buying momentum and market breath following last week’s less than convincing recovery, further strength will be suspect in terms of sustainability and resilience.

The cautious market undertone, with regard to domestic and external economic growth prospects, coupled with unresolved geopolitical risks in major global hotspots, should continue to undermine recovery potential.

On the index, immediate overhead resistance stays at 1,742 and 1,762, the respective 50 per cent Fibonacci Retracement and 38.2 per cent FR of the rise from 1,657 low on 28 June to the 1,826.9 high of 28 August, followed by 1,787, the 23.6 per cent FR, and subsequently the 200-day moving average at 1,802.

Crucial retracement supports are at 1,697, the 76.4 per cent FR, followed by 1,680 and then 1,657 point levels, respectively.

The cautious market undertone, with regard to domestic and external economic growth prospects, coupled with unresolved geopolitical risks in major global hotspots, should continue to undermine recovery potential.