US correction rips through global stocks
Review: The world’s markets were pulled into a sharp decline by an overheated Wall Street as the International Monetary Fund’s (IMF) cuts in global growth forecasts drove investors into a selling frenzy.
Bursa Malaysia returned to a bearish outlook and three-month trading lows as the string of negatives pummelled the stock exchange.
At the start of the week, China’s markets opened deep in the red following a weeklong holiday. The Shanghai Composite Index fell 3.7% while the blue chip CSI 300 dropped 4.3%. China’s central bank had attempted to increase liquidity by cutting banks’ cash reserves and lowering financing costs.
But tech stocks were already shaky as reports that Chinese spies had compromised US hardware led to fears that vendors would have to undergo supply chain audits to ensure their safety.
The FBM KLCI, which had put in a negative performance over the previous week, was trading precariously close to its immediate support of 1,775. Given the overall weakness in the region, it closed Monday 1.4 points lower to 1,775.75, suggesting that investors were ready to buckle below the support at the next sign of danger.
Gamuda stole the limelight in Monday’s trading and remained high on investors’ radar screens over the rest of the week as news broke that its contract for the tunneling portion of the mass rapid transit line 2 had been first cancelled and then revisited for negotiations.
The stock saw immediate selling pressure, sliding 24% in a single day.
Wall Street tracked the negative sentiment seen in Asia earlier in the day. The US markets fell for a third straight session as the effect of the trade war was seen to take its toll on the global economy.
On Tuesday, China allowed the yuan to depreciate further, adding to more negative pressure for emerging currencies. While the weaker yen was seen to help improve the outlook on China’s exports, it also drew the risk of accelerating capital outflows, lending even more pressure on the currency.
Back home, Prime Minister Tun Dr Mahathir Mohamad announced that the government was mulling new taxes for the upcoming national budget to help offset the nation’s debt.
The FBM KLCI reacted slowly to the announcement, sliding a mere 1.6 points to 1,774.15, but still holding close to the support.
The same day, the IMF sounded an alarm to investors by cutting its forecast of global growth for both this year and the next, downgrading its outlook on the US, China and Europe.
The selloff on Bursa Malaysia picked up steam on Wednesday. Led by Axiata and Tenaga Nasional, the FBM KLCI closed 38.97 points or 2.2% lower at 1,735.18 as the combination of potential new taxes and IMF cuts weighed on the market. The fall took the index into bearish territory and turned the technical outlook negative.
Overnight, Wall Street panicked at the IMF report. The Dow Jones posted an 832-point or 3.15% decline while the technology sector faced the brunt of the pullback. Netflix dropped as much as 8.4% , Amazon 6.1% and Apple 4.6% in the day’s session. European stocks were similarly in decline, with every major index sliding into a sea of red.
This would be a sign of things to come for Asia at Thursday’s open. In early morning trade, sellers quickly took the FBM KLCI down as much as 53 points. The market retraced some losses in the later session but ended the day firmly below technical support levels, having lost 26.69 points at 1708.49.
Amidst the carnage, it was reported that over 1,000 China stocks had hit their daily 10% loss limit. The Shanghai Composite Index was down over 5%, the Nikkei 3.9% and the Kospi 4.4%.
Wall Street continued to slide on Thursday night. The Dow and S&P500 lost 2.1% each while the Nasdaq dropped 1.3%. However, Asia bounced back on Friday with gains in all key indices.
The local index similarly rebounded, rising 22.25 points to 1,730.74
Statistics: Week-on-week, the major index was down 46.41 points or 2.6% to 1,730.74. Total turnover for the week stood at 12.52 billion shares amounting to RM12.5bil compared with 11.87 billion shares worth RM10.12bil over the last trading week.
Outlook: The plunge in Wall Street can be seen to be a healthy correction after the protracted rally in US equities. Given the current global situation, the selldown could be seen as investors taking the opportunity to cash in on profits just before the start of the next corporate earnings season, which some expect to be weak.
In the case of Bursa Malaysia, the strong rebound on Friday along with other world markets, suggests that there is still confidence in bargains. The momentum indicators are showing a recovery from oversold conditions, indicating a good time to buy on weakness.
While President Donald Trump and Premier Xi Jinping plan to meet at the G20 summit at end-November, in the interim the FBM KLCI can be seen challenging the support-turned-resistance at 1,733. Positive news would lead to a break out towards 1,775.