INVESTORS CAUTIOUS AHEAD OF BUDGET

FOREIGN selling pressured the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) down to a fresh four-month low last week, with telecommunication stocks leading the decline amid concerns over weak earnings due to increased competition and domestic sector reforms.

The correction was aggravated by a global market selloff sparked by increased geopolitical risks in Saudi Arabia, United States-China trade tensions, Italy’s budget and Brexit worries, while selloffs in United States technology stocks raised worries over global growth.

Week-on-week, the FBM KLCI tumbled 49.08 points, or 2.8 per cent, to 1,683.06, with Nestle (-70 sen), Tenaga (-52 sen), CIMB (-42 sen), Sime Darby (-40 sen), Public Bank (-38 sen) and Hong Leong Bank (-30 sen) contributing the most to the losses. Average daily traded volume was 2.07 billion shares worth RM1.92 billion last week, compared with two billion shares worth RM2.01 billion in the previous week.

Despite last week’s heavy corrections, prospects for oversold rebound remain weak ahead of the 2019 Budget tabling this Friday. Bursa Malaysia’s corrections so far have been influenced by a string of external and local factors, which will remain relevant even after Friday. But should the 2019 Budget turn out to be not as tight as widely expected, an immediate-term relief rebound to above 1,700 points should not be discounted post-budget announcement.

However, sustainability of any relief rebound would be capped as the world will be watching anxiously for the outcome of the G20 meeting in Buenos Aires, Argentina, on Tuesday and December 1. US President Donald Trump and China President Xi Jin Ping are slated to meet on the sidelines of the meeting to discuss various issues, especially on trade between the two countries.

Yuan weakened further against the US dollar last week and is edging closer to the psychologically important level of 7.00 per dollar. Breaking this mark will intensify yuan selling and this should be echoed in other regional currencies as well.

On the local front, with November around the corner, the thirdquarter results reporting season will gain momentum. Investors will be looking anxiously for signs of recovery in corporate earnings of the FBM KLCI-component companies, especially in the absence of Good and Services Tax in July and August.

China’s Purchasing Managers’ Index is also due on Wednesday. Any signs of weakness will affect market sentiment, especially after the country’s industrial profit data for September released on Saturday showed paltry growth of 4.1 per cent.

The release of September core personal consumption expenditure today and October non-farm payroll and unemployment numbers in the US this Friday should keep alive the expectations for another 25-basis point hike in the US Federal Reserve’s December monetary policy meeting.

Technical Outlook

Bursa Malaysia’s blue chips fell on Monday, led by foreign selling on Axiata, Maxis and TM. The FBM KLCI ended down 9.67 points near session lows of 1,722.47, off the opening high of 1,730.27, as losers beat gainers 497 to 315 on total turnover of 1.95 billion shares worth RM1.68 billion.

Amid a global market selloff on Tuesday, the FBM KLCI slumped 24.87 points, or 1.4 percent, to close at the day’s low of 1,697.60 with 2.01 billion shares worth RM2 billion changing hands.

Stocks gave back early gains to end near session lows on Wednesday, as concerns over geopolitical hotspots and global growth continued to dampen market sentiment. The key index fell 7.56 points to settle near the day’s low of 1,690.04 on higher turnover of 2.34 billion shares worth RM1.92 billion.

Spillovers from overnight US tech-stocks selloffs dragged the local market lower the subsequent day, but local stocks managed to close off lows helped by bargain-hunting interest. The FBM KLCI slid another 3.45 points to close at the day’s high of 1,686.59 on total turnover of 2.24 billion shares worth RM2.33 billion.

On Friday, the index slipped 3.53 points to close the week at 1,683.06, off an early high of 1,691.44 and low of 1,678.35, as losers edged gainers 460 to 373 on reduced turnover of 1.82 billion shares worth RM1.68 billion.

Trading range for the blue-chip benchmark index expanded to 59.93 points last week, compared with 24.67 points in the previous week, as its heavyweight slumps dragged it to fresh four-month lows. For the week, the FBM EMAS Index lost 379.41 points, or 3.2 per cent, to 11,591.11, while the FBM Small Cap Index tanked by 845.25 points, or 6.3 per cent, to 12,538.99.

On technical momentum, while the daily slow stochastics indicator for the FBM KLCI is mildly oversold, the weekly indicator continued heading south to retain bearish momentum. The 14day Relative Strength Index (RSI) indicator is also oversold with a reading of 23.53 on Friday, while the 14-week RSI indicator declined to a weak reading of 34.24.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line deteriorated further into negative ground, while the weekly MACD turned south to reinforce a bearish trend. The bearish expansion on the +DI and -DI lines in the 14day Directional Movement Index (DMI) trend indicator is another bearish reinforcement of the current weak market trend.

Conclusion

The increasingly bearish momentum readings on technical indicators implies further potential downside risk for the local market. Given the ongoing correction in global markets, rising geopolitical risks in hotspots such as Saudi Arabia and the European Union, global trade tensions, and valuation and growth concerns, expect downside volatility to persist this week.

On the index, immediate resistance will be at 1,700, then 1,722, 1,742 and 1,762, which are the respective 61.8%FR, 50%FR and 38.2%FR levels of the rise from 1,657 low on June 28 to the 1,826.9 high of August 28, followed by 1,787, the 23.6%FR. Crucial supports are from the October 25 low of 1,670 and then 1,657, the June 28 low, with next key level seen at 1,617, the 123.6%FP.

The increasingly bearish momentum readings on technical indicators implies further potential downside risk for the local market... expect downside volatility to persist this week.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.