Growing trade dispute hit Bursa

REVIEW: US President Donald Trump’s go-ahead on the US$50bil in tariffs on Chinese imports last Friday, and China’s subsequent promise of retaliation were precursors to a shake-up in global equities this past week.

Emerging markets, seen to be the most affected by disruptions in global growth, now have to contend with an escalating trade war on the one hand and tightening liquidity in global markets on the other as the European Central Bank signals an end to quantitative easing and the US Fed raises interest rates.

The ringgit, which slipped under the 4.0 mark against the greenback during the week, also faced mounting headwinds as crude oil prices came under renewed pressure from a proposed initiative by Opec and Russia to ease up on global supply cuts even as the trade war softens demand.

Brent crude futures dropped nearly US$3 to a low of US$73 a barrel on Trump’s Friday announcement before retracing to hover below US$74 a barrel over the course of the week.

On the domestic scene, the deterioration in US-China trade relations only served to continue the foreign selling that has plagued the stock echange since late April.

Total fund outflows from the Malaysia equities market have topped US$1bil so far this year. Analysts, though, pointed out that the situation is not unique to Malaysia in the region with Taiwan and Thailand each seeing more than US$5bil of outflows year-to-date.

On Monday, Bursa Malaysia came out of the Hari Raya weekend to take the brunt of the trade war announcement. The FBM KLCI slid 18.35 points to 1,743.43 along with other regional peers. The financial sector weighed on the market with heavyweight banks dropping in unison.

On Tuesday, the China and Hong Kong markets, which were closed for a national holiday on the previous day, opened to a sea of red. At the centre of the trade war conflict, China’s market played catch up to the turmoil in global markets. The Shanghai Composite Index plummeted 3.78% while the Hang Seng Index fell 2.78%.

The FBM KLCI slid 28.07 points to 1,715.36, breaching yet another support level in line with regional markets.

Overnight, Wall Street also suffered a pullback as its industrial sector, seen to be one of the most negatively affected by the tariffs, became one of the worst hit with Boeing and Caterpillar leading the declines.

At Asia’s midweek open, however, China seemed to steady itself following the previous session’s sharp losses. Nevertheless, the rebound was mild with the Shanghai Composite Index putting on 0.3%.

There was little relief for the local bourse, however. Despite signs of a rebound in early trade, the FBM KLCI ended the session 5.61 points lower to to rest on the immediate support at 1,709.75.

As pointed out by a report by Schroders Economic Group on Wednesday, Malaysia along with Taiwan and Singapore lead the Top 10 markets most affected by US tariffs on Chinese goods via the supply chain.

Thursday saw the local benchmark index break through the support level to put itself in correction mode and firmly in the grips of a bear market.

However, the index managed hold near the next support of 1,680 and, bouncing off, pared losses and closed 17.18 points lower at 1,692.32.

Overnight, Wall Street extended its losing streak to eight days. Concomitantly, Friday’s open in Asia saw continued weakness in equities. The FBM KLCI spent the morning session in the red but received a lift from rebounding bank stocks in the later session to bring the index just 1.83 points higher at 1,694.15.

Statistics: On a week-on-week basis, the major index was down 67.63 points, or 3.8%, to 1,694.15 points. Total turnover for the trading week stood at 10.2 billion shares amounting to RM12.01bil compared with 8.71 billion shares worth RM9.83bil in the previous Hari Raya-shortened week.

Outlook: Up until the previous Friday, news flow over the trade war had been viewed as a series of threats and bluffs, creating downwards pressure with intermittent periods of relief. However, the latest announcements by Washington and Beijing are framing the conflict in sharper focus: things are going to get worse before they get better.

If the equity markets of the perpetrators are anything to go by, the situation is steadily deteriorating. The Dow Jones Index has erased all the gains it made year to date and slipped under the 50-day SMA to indicate a market under pressure while the Shanghai Composite Index is trading at a two-year low.

Back home, there are indications from the negative crossings taking place between the key simple moving averages on the FBM KLCI chart that a long-term bear market is forming. the 50-day SMA has already made a downwards pass of the 100-day SMA line, and is looking to intersect with the 200-day SMA, leading to the formation of the dreaded “death cross”. The momentum indicators show downside bias although the slow-stochastic has turned up from the oversold area.

As the week drew to a close, there was temporary relief that the index held held above the support of 1,680. A slip under would see the index move towards 1,652 while retracement would shoot for 1,709.