China’s fiscal boost lends buy signal

Picking up on the previous week’s momentum and the return of foreign funds, the FBM KCLI crossed into 1,800 territory by midweek, returning the index to May’s pre-election trading levels.

Judging by the performance of regional markets, the raft of positive corporate earnings from the US seemed to have outweighed the impact of the uncertainties caused by an escalating trade war.

Simultaneously, stimulus measures by China to counteract the effects of the US tariffs gave investors the confidence that economic growth would be sustained by an accomodative fiscal environment and improved government spending. This became a focal point to spur buying interest in global equity over the past week.

The dark cloud that hung over markets started with the previous Friday’s announcement that China would respond to US trade taxes with differentiated tariffs on US$60bil of US goods.

The escalation unnerved markets but the move was expected. Rather than dwelling on the inevitable, it seemed investors were ready to soak up any good news in the interim in their search for buying opportunities. The positive performance on Wall Street would offer up leads, helping to buffer the anxiety in Asian markets.

As the week opened, Chinese equity would remain dishevelled as it took the brunt of the uncertainty. On Monday, the Shanghai Composite Index slid over 1% to chalk up a fourth straight day of losses.

The FBM KLCI, along with other Asian markets, held little changed. It ended the session lower by 0.34 points to 1,779.75 with signs of the market gaining strength as advancing counters outweighed decliners 514 to 421.

More positive earnings from Wall Street were announced overnight with Berkshire Hathaway showing impressive results and Facebook’s plan to start new services piquing investor interest on the Nasdaq.

However, it was China which impressed as Asia opened for business on Tuesday, snapping a four-day losing streak on expectations of increased spending as part of its policy support in light of the trade war. The yuan had also been made cheap to investors as the People’s Bank of China eased borrowing costs.

At market close, the Shanghai Composite Index rose 2.7% while the blue chip CSI300 gained 2.9%.

In tandem with the regional lift, the FBM KLCI gained 11.34 points to 1,791.09.

At midweek, there was also evidence of strength of the global economy and continued resilience in the US stock market. As Wall Street’s major indices continued to push higher, China’s trade data was showed to grow faster than expected. Both Chinese exports and imports jumped in July, suggesting that global demand remained intact despite the trade conflict.

Nevertheless, China made a show of strength late Wednesday by announcing additional 25% tariffs on US$16bil of US imports, a tit-for-tat response to Trump’s latest move that will take effect on Aug 23.

China’s market retraced some of the previous session’s gains on the escalation but the FBM KLCI experienced a jump of 13.64 points to 1,804.73, passing a key psychological level at 1,800.

The rally had taken root by Thursday as investors zoomed in on measures employed by the Chinese government to boost growth. Chinese stocks rallied and the FBM KLCI held firm despite the pressure on oil prices and the ringgit from the trade war. The index ended just 0.22 points higher at 1,804.95.

Yesterday, the index rose 0.8 points to 1,805.75 as the local market bucked the negative trend in the region resulting from growing trade tensions.

On a Friday-to-Friday basis, the major index was up 25.66 points, or 1.4%, to 1,805.75 points. Total turnover for the trading week stood at 11.93 billion shares amounting to RM11.08bil compared to 11.18 billion shares worth RM10.7bil over the previous week.

The prospect of more Chinese money supporting industries has become a buffer to what looks like a trade war coming into full swing. The positive lead from the strong performance of US equities is also lending some incentive to global investors. Nevertheless, the drawn-out trade war will outlast the positive sentiment of these developments, lending concern as to whether the present recovery on the local market can be sustained, or if, more likely, more turmoil is on the horizon.

On the domestic front, the local market appears to have shrugged off the post-election effect with the Pakatan Harapan government’s 100-day milestone arriving on Aug 17. The calming of nerves and gradual return of foreign funds adds to the positivity in the interim period before the implementation of more US tariffs and further retaliation. Friday’s performance capped off what was a fifth straight weekly gain for the index.

On the technical outlook, the slow-stochastic is showing a retreat from overbought levels and has crossed into a “sell” signal. This suggests a pullback may be due while investors realise some gains before resuming a forward push.

The next resistance can be found at 1,825 while 1,800 and the nearby 200-day simple moving average at 1,790 serve as support for the index.