Investors turn to earnings prospects

REVIEW: The lull that came from receding trade war tensions at the start of the week didn’t last long before they were re-agitated with a fresh round of US tariffs.

However, institutional buying kept the FBM KLCI in positive territory even as foreign funds accelerated their selloff to mark an 11th straight week of outflows. A continued rebound was seen over the five-day trading week, facilitated by strong US earnings growth.

US President Donald Trump’s Wednesday announcement of a 10% tax on another US$ 200bil of Chinese imports has taken the trade fight to another level.

The quantum of imports subject to the tariffs pose a major consideration.

Given that US imports into China amount to only US$ 130bil, a tit-for-tat retaliation by Beijing would not be possible. This may force China to consider alternatives – regulatory tightening and bureaucratic intervention – that would make doing business in and with China more difficult for US companies.

This fight, seen to be more political than a matter of trade interest, comes at odds with what should have been a decidedly bullish moment for equity traders. The US corporate earnings seasons, expected to show positive earnings growth, has kicked off, giving a much-needed boost to investor sentiment.

On Monday, markets as a whole started the week on a positive note as US payroll data released over the weekend became the catalyst for a rebound.

The Shanghai Composite Index was up 2.5%, Hong Kong’s Hang Seng rose 1.4%, South Korea’s Kospi added 0.6% and Japan’s Nikkei put on 1.2%. The FBM KLCI also responded, ending the day’s trading up 8.77 points to 1672.63.

The UK was also in the spotlight as two senior officials in Theresa May’s government resigned over their dissatisfaction with the Brexit deal. The pound sterling fluctuated to this news even as the US Dollar Index rebounded from the previous week’s decline.

In Asia, Monday’s bounce continued into Tuesday, as the strong rise in Chinese stocks helped to assuage concerns and rally investors to bargains.

At the close, the Shanghai Composite Index rose 0.44% while the blue-chip CSI300 index grew 0.24%. The FBM KLCI followed suit as institutional investors continued to pick up the market, adding 14.5 points to 1687.13.

Overnight on Wall Street, the corporate earnings season got under way to high confidence as investors expected a repeat of the first quarter results, which had seen 24% growth on a year-on-year basis.

However, this positivity would be shortlived given Trump’s Wednesday morning tariffs announcement which put the kibosh on the Asian rally.

Commodities prices slipped and Brent crude oil dropped as much as US$1 at one point. Shanghai’s Composite Index fell 1.8%, the Hang Seng slid 1.3% and the Nikkei dropped 1.2%.

But the FBM KLCI avoided the the bloodshed as local buyers stepped up to pick up on cheap stocks. While market breadth was decidedly negative to the tune of 556 losers versus 261 gainers, the benchmark index hung on to a 1.64 point gain to 1,688.77 thanks to the performances of select heavyweights.

Thursday proved eventful for construction stocks as it was announced that the light rail transit 3 project would proceed at half the original price tag.

Counters such as George Kent jumped 30 sen to RM1.29 as it hit the upper daily limit, while MRCB gained 14.5 sen to 72.5 sen.

Banks were also lifted by the uptick in activity, with CIMB and Maybank leading the index up at 1703.57 points.

On Friday, the local market continued its recovery, rising 18.36 points to 1,721.93 as investor focus turned towards fundamentals.

Statistics: On a Friday-to-Friday basis, the major index was up 58.07 points, or 3.5%, to 1,721.93 points. Total turnover for the trading week stood at 12.04 billion shares amounting to RM 11.65bil compared to 10.05 billion shares worth RM 8.36bil over the previous week.

Outlook: Bargain hunting on the local equities scene helped the market’s recovery over the week, although foreign funds continue to exit the country. Nevertheless, the trade war has ramped up and is expected to intensify further as no resolution remains in sight.

Oil prices are also coming under pressure given Opec and Russia’s plan to increase supplies on the global market while the ringgit is expected to slide further against the greenback as the trade conflict worsens.

On a more positive note, the technical indicators show bulish momentum, suggesting that the current recovery is set to continue over the near term. The FBM KLCI has crossed the 23.6% Fibonacci retracement level based on its decline from a peak of 1,895 in April. Continued upside momentum will see the potential to rise further towards the 38.2% retracement level at 1,750 and further challenge the nearby resistance at 1,760, which meets the 50-day simple moving average.

However, the slow-stochastic indicates an overbought condition and investors are likely to lock in profits before another sour turn in the trade war saga. Should the market take a breather from the rally, there may be a pullback to the support at 1,680.

Global Forex Market

US dollar erased losses from the week prior, appreciating 0.8% to 94.827 following escalating trade concerns after the Trump administration unveiled a list of Chinese goods worth US$ 200bil will be taxed 10%. However, by the end of the week, US President Trump cited that he would try to negotiate a fair trade deal with China.

Meanwhile, the US dollar was seen rising higher after the release of firm inflation data which supported the case for a fourth rate hike. The consumer price index (CPI) and core CPI rose 2.9% year-on-year (y-o-y) and 2.3% y-o-y in June from 2.8% y-o-y and 2.2% y-o-y respectively in May.

Over the week, Brent fell by 4.6% to US$74.45 per barrel following the increased production from Saudi Arabia and the reopening of Libyan oil ports that will see the restoration of production and exports back to the normal level, relieving concerns of rising production from Opec and its allies may lead to a potential spare capacity crunch.

On a separate note, American Petroleum Institute has announced a drop in US crude inventories by 6.8 million barrels last week while the Energy Information Administration reported a fall of 12.6 million barrels in previous week’s crude stockpile.

The euro depreciated by 0.7% largely on the back of a stronger US dollar. The euro was seen vulnerable after the European Central Bank (ECB) trimmed gross domestic product (GDP) forecast to 2.1% in 2018 from its previous estimate of 2.3% while the ZEW Economic Sentiment Index for the bloc and Germany for July deteriorate further to minus 18.7 and minus 24.7 from minus 12.6 and minus 24.7, respectively in June, the lowest for Germany since 2012.

On the monetary front, ECB president Mario Draghi’s speech drew optimism after reiterating ECB could end its quantitative easing programme despite rising concerns over trade war and some degree of hawkishness noted from ECB minutes.

The pound weakened by 0.4% to 1.321 as trade war and Brexit noises escalated. As the resignation of the pro-Brexit foreign minister Boris Johnson, market later viewed the resignation as raising the possibility for a “softer” Brexit.

The pound recouped some loses on the back of monthly GDP grew 0.3% month-on-month (m-o-m) (April: +0.2% m-o-m) and the release of “soft” Brexit Blueprint by the UK which proposed to maintain close trade ties between UK and the bloc.

The Japanese yen plunged by 1.5% to 112.55 as monetary divergence overshadowed the news on intensifying trade tensions. Meanwhile, the Bank of Japan has maintained an upbeat view on the country’s economy and announced to maintain its ultra-easy policy until the 2% inflation rate target is achieved.

Most Asia ex-Japan currencies depreciated against the US dollar with the exception of Indian rupee. The Indian rupee rose 0.21% to 68.5725 after recorded a five-month high inflation of 5% y-o-y, up from 4.87% y-o-y in April, bolstering the chance that the central bank would continue raising the benchmark rates in August. Meanwhile, South Korean won fell 1.25% to 1126.00 following the central bank’s decision to maintain the key rate as a result of soft economic data and concerns over spillover effects from the global trade tensions.

The ringgit dived by 0.3% to 4.041 due to the stronger greenback. Adding fuel was pressure from continuous foreign outflows, which recorded a net outflow of RM 516.13mil during the week, but the local bourse rebounded by 1.8% to 1,704 points.

Meanwhile, Bank Negara maintained the interest rate at 3.25% while ending the meeting on an overall neutral tone. This week’s economic releases includes May Industrial Production, which recorded a growth of 3% y-o-y from 4.6% y-o-y in April, and May retail sales, which grew at 9.3% y-o-y versus 7.9% y-o-y in April.

US Treasuries (UST) Market

The yield curve flattened further as the 10/2 spread narrowed down to 25 basis points (bps) from 28bps earlier this week. As the trade war uncertainties dominated headlines, concerns grew on the sustainability of US growth outlook.

Meanwhile, the yields spiked on short end of the curve after the release of June inflation print, which firmed the outlook for Fed’s fourth rate hike. At yesterday’s noon pricing, the 2-, 5- and 10-year benchmark UST yields stood at 2.59%, 2.76%, and 2.85% respectively.

Malaysian Bond Market

Strong buying momentum was seen in the local bond space this week, driving the yield in local govvies’ to fall across the curve with the exception of the 10-year, which rose 0.5bps to 4.095% as risk-off sentiment emerged.

Meanwhile, the focus was also on the re-opening of 10-year Government Investment Issue’s new issuance, which saw RM 4.bil up for auction. The auction closed with a strong bid- to-cover of 2.439 times.

At yesterday’s noon pricing, the 3- , 5- ,7- , 10-, 15-, 20- and 30-year benchmark Malaysian Government Securities (MGS) yields settled at 3.54%, 3.75%, 3.96%, 4.09%, 4.54%, 4.79% and 4.91% respectively.

Trading activities for the benchmark local govvies’ eased to RM10.6bil from last week’s RM 18.5bil.

Meanwhile, trading activities in the secondary corporate bond market improved from last week, with total trading volume increasing to RM 1.7bil versus last week’s RM1.6bil.

Some 49% of the trading volume was from GG/AAA with 46% from the AA segment and the remaining 5% from the A segment. In the GG/AAA segment, notable trades include 2020–2039 DanaInfra Nasional Bhd tranches, which closed with mixed yields between 4.02% and 5.07% and a total trading volume of RM 265mil.

Besides, 2019-2037 Prasarana Malaysia Bhd tranches registered yields mixed between 3.75% and 4.98%, with RM 185mil changing hands. Furthermore, interest was seen in ‘02/21 and ‘02/24 GovCo Holdings Bhd bonds, which closed with yields mixed between 4.05% and 4.33%, and with RM 110mil traded.

Meanwhile, ‘03/19 Small Medium Enterprise Development Bank Malaysia Bhd ended with yields 12bps higher at 3.80% and a volume of RM50mil.

Elsewhere in the AA segment, notable trades were seen in the 2029-2035 Southern Power Generation Sdn Bhd tranches, which recorded a trading volume of RM130mil with yields closing mixed between 5.00% and 5.36%.

Furthermore, ‘10/22 RHB Investment Bank Bhd bond posted a trading volume of RM100mil and closed with yields 4bps higher at 4.94%. There was some interest in ‘01/27 and ‘12/32 Sarawak Energy Bhd bonds, closed with yields mixed between 4.81% and 5.22%, recording a total trading volume of RM90mil.

In addition, ‘09/18 and ‘10/18 Public Bank Bhd bonds registered yields mixed between 4.24% and 4.44%, with RM45mil changing hands.

Ringgit Interest Rate Swap (IRS) Market

As at yesterday’s noon pricing, the three-month Klibor stood at 3.69%. Elsewhere, the IRS curve moved in tandem with the MGS while the fiveyear credit default swap fell over the week.

For enquiries, please contact ambankfx-research@ambankgroup.com or bond-research@ambankgroup.com