Three factors that affect the market

REVIEW: The change of landscape – economic in Malaysia and political in the US – has kept investors on their toes in recent days, with guesses and rumours over how the upheaval will play out before the dirt settles.

On the whole, Budget 2019 was a positive surprise by being an expansionary budget, and one that offers a smaller fiscal deficit moving into next year.

However, the unexpected introduction of additional fees for gaming licences and higher casino duties in Budget 2019 took a heavy toll on Genting stocks. Genting Malaysia in particular became the target of furious selling as the week opened for business.

The stock plunged its daily loss limit of 30% before partially retracing to end the day 20% lower at RM3.61. Holding company Genting was also impacted but to a lesser degree, shaving off 6% by the end of day.

The FBM KLCI’s performance on Monday would have been positive if not for the sharp fall in the two stocks. The index traded within a range of 20 points and ended the day 5.07 points lower at 1,708.8, once again seeking solace in the support at 1,709.

British American Tobacco, on the other hand, was lifted by the government’s promise to target illicit cigarettes and decision not to hand down any additional excise taxes at the moment. The stock rallied, jumping about 19% since the Thursday before the budget announcement.

But while all this was taking place on the domestic market, the geopolitical environment continued to roil markets. Uncertainties weighed heavily on investor sentiment.

West Texas Intermediate crude prices slid into a bear market after losing 20% of its value from a peak of US$76.90 a barrel as the US offered waivers to eight of Iran’s top importers of crude following sanctions on the Middle Eastern nation.

With this move, the supply crunch many had predicted appeared to have been averted. From its perch of US$86.29 a barrel this year, Brent crude had descended about 18% to hover above US$70 a barrel.

The US mid-term elections that took place on Wednesday morning, local time, was also keenly watched. It fell short of a “blue wave” but the Democrats made inroads into Congress nonetheless, securing a majority in the House of Representatives while the Republicans maintained its hold on the Senate.

For investors, this meant that US President Donald Trump’s plans for additional corporate tax cuts were effectively scuttled. US stock futures retreated on the development and Asia followed suit, retracing some of the early gains it had made when it had seemed the Republicans were taking both chambers of Congress.

By Wall Street’s open, however, it had become apparent that investors had taken to the idea of Washington in gridlock. The Dow Jones Industrial Average and S&P 500 each gained 2.1% while the Nasdaq jumped 2.6%.

Observers are betting that to keep the economy growing in 2019, Trump may need to scuttle policies that are damaging to businesses, including easing up on the trade dispute with China. The decision ultimately lies with the ruling party, however, as tariffs on foreign goods are controlled by the executive branch.

On Thursday, Asia tracked Wall Street’s jump and rose in unison. The FBM KLCI continued to establish a positive trend, having picked up slight points in Wednesday’s session. There were no surprises with Bank Negara’s announcement to stay the course on monetary policy and interest rates. The index rose 6.54 points to 1,721.42

Yesterday, the US Federal Reserve also decided to maintain the interest rate although it indicated it was on course to a fourth rate hike in December. Asian markets, hoping for more dovish guidance, were disappointed by the news. The FBM KLCI slumped 13.33 points to 1,708.09.

Statistics: Week-on-week, the major index was down 5.78 points or 0.3% to 1,708.09. Total turnover for the Deepavali-shortened week stood at 8.49 billion shares amounting to RM9.87bil compared with 11.49 billion shares worth RM9.58bil over the last trading week. Outlook: Hopes that the slip on Wall Street earlier in the month would prompt the US Fed to reconsider a fourth interest rate hike seemed all but dead as the central bank focused on positive economic data rather than growth in business investments. Coupled with a higher fiscal deficit target announced in Budget 2019, the ringgit is expected to face selling pressure over the short term, which could dampen the local equity market.

Yesterday’s retreat to just below the immediate support of 1,709 once again puts the FBM KLCI on a bearish footing with the 1,700 and 1,680 marks below it serving as further support. Given the slow-stochastic’s retreat to neutral ground from overbought conditions, there is expected to be further decline in the near term. However, the index may yet rebound later in the week and return above 1,709. The trading range is pegged at 1,680 to 1,733.

Placed highly on investors’ agenda is the G20 Leaders Summit. Market performance will be swayed by comments made by political leaders in the lead up to the Trump-Xi meeting at the end of the month, which would possibly trigger a break out in either direction.

Global Forex Market

THE dollar appreciated by 0.46% to 96.7 by the end of the week after the Fed maintained a hawkish stance during the FOMC meeting.

As expected, the Fed kept interest rate unchanged between 2%-2.25% but was seen optimistic on the economy, citing strong jobs market, robust household spending and outlook for risk is “roughly balance”.

However, it is noteworthy that the Fed downplayed the pace of investments in the economy. Meanwhile, the dollar was seen weaker post midterms election as the Democrats took control of the House while the Senate is with the Republicans. With a political gridlock in White House, the dollar was weighed down by expectations of significant changes for how the president can accomplish his domestic goals.

Brent oil extended loss for another 2.9% to close at US$70.7/bbl, dropping closed to 18% from its peak in October. The loss of supply from Iran sanction that took effect this week seems to be offset by the increase production in US. Growing supply in US capped the price gained in mid-week when China announced record high of averaged 9.61 million bbl/d. EIA also recorded an additional 5.78 million bbl to the inventories in the week ended Nov 2.

The report cited US output hit alltime high at 11.6 million bbl/d, further solidified its position as the top single country oil producer. Production in US outpaced Organisation of the Petroleum Exporting Countries (Opec) pushing WTI lower more than 20% from the peak. Opec and Russia on the other hand, may cut production at Sunday’s meeting to sustain the price amid excess supply.

The euro weakened by 0.22% to 1.136 against the stronger dollar as well as a weaker outlook highlighted in the latest EU Bulletin. EU government projected economy growth to ease as the economic cycle matured. Besides, the euro was partly weighed down after European Commission trims Italian growth forecast, adding concerns on the Italy’s debt and economic outlook.

The strength in pound was shortlived after the dollar rebounded. Over the week, the Brexit sentiment was fairly optimistic as Prime Minister Theresa May looks to secure a deal with the EU. The latest report also suggested May will seek more time from Brussels to strike a deal with the cabinet. Meanwhile, economic release were rather muted with only October Halifax House Price Index rose albeit slowly by 1.5% y/y from 2.5% y/y in September.

The pound still closed 0.16% high- er to 1.306 by end of the week.

The yen weakened by 0.78% to 114.1 against the greenback as demand for safe haven falters as risk events was broadly balanced. Also, we noticed Bank of Japan Monetary Policy Meeting minutes revealed the economy was continuing its modest expansion at a satisfactory rate supported by domestic demand while inflation is projected to climb gradually towards their 2% target.

The majority of the Asian ex-Japan currency appreciated against the dollar with the rupiah leading the pack, up 2.92% to 14977 due to strong foreign buying. We noticed a net foreign inflow of US$260mil during the week into Jakarta’s equity market.

Meanwhile, the yuan fell by 0.13% to 6.934 amid falling foreign reserves, down to US$3.05 trillion in October from US$3.087 trillion in September – lowest since April 2017.

Amid a short working week, the ringgit appreciated by 0.31% to 4.164. Apart from weaker dollar during early of the week, fading noises from Budget 2019 largely kept the currency supported. At the same time, Bank Negara kept interest rates unchanged at 3.25%.

The tone was “neutral” with growth expected to remain steady supported by private activity although risks from trade tensions, volatile financial markets, and US policy normalisation remain. Meanwhile, international reserves continued its declining trend to US$101.7bil as of Oct 31 from US$103.0bil in September.

US Treasuries (UST) Market

Focus in global markets this week falls on US mid-term election and FOMC rate decision. While US Republicans retained the Senate, Democrats took control of the House; effectively putting a “chokehold” on the Trump administration.

On the other hand, the Fed kept rates unchanged as expected; setting stage for a rate hike in December.

As such, risk-on sentiments permeates global markets with UST10year inching up to a week high of 3.24% while the 10/2 spread narrowed slightly to 27bps from the week prior. As at Friday, the 2-, 5-, and 10-year benchmark UST yields stood at 2.96%, 3.08%, and 3.22%.

Malaysian Bond Market

Muted flows were seen in the local bond market in tandem with a shorter trading week due to Deepavali festivities and political uncertainties vis-à-vis US mid-term election in global markets.

This is despite Bank Negara’s MPC decision which left OPR unchanged with a rather neutral statement. Subdued trading activities were however short-lived as heavy bidding interest was seen against the backdrop of stronger ringgit and general risk-on sentiments in global bonds. While volume remained soft, yields eased 1.5-6.5bps across curve.

As at Friday morning, the 3-, 5-, 7-, 10-, 15-, 20-, and 30-year benchmark MGS yields settled at 3.66%, 3.80%, 4.01%, 4.10%, 4.56%, 4.77%, and 4.93%.

Flows for local govvies tapered off to RM5.4bil compared to last week’s RM13.0bil.

Likewise, trading activities in the secondary corporate bond space tapered off by 30% to RM0.9bil versus last week’s RM1.2bil. Some 33% of trade volume came from the GG/ AAA rated segment, while 65% were attributed to AA-rated papers and the remaining 2% from the A-segment.

In the GG/AAA segment, interest was seen for SME Development Bank Malaysia Bhd’s short term 03/19 paper which closed at 3.70% with RM100mil traded.

Meanwhile, Lembaga Pembiayaan Perumahan Sektor Awam’s 10/25 IMTN witnessed RM40mil flows with yields closing at 4.20%. This is followed by Aman Sukuk Bhd’s 04/24 and 05/25 papers which saw RM30mil trade volume with yields closing between 4.42% and 4.50%. Lastly, interest was seen for Pengurusan Air SPV Bhd’s 06/25 and 09/25 IMTNs which closed between 4.21% and 4.23% with RM25mil traded.

On the AA-rated front, flows were scattered across names with Public Bank Bhd’s 04/27 sub-notes dominating the week’s volume with RM100mil changing hands at 4.59%. This is followed by Sports Toto Malaysia Sdn Bhd’s 19s papers which closed between 4.57% and 4.58% with RM43mil traded.

Meanwhile, Celcom Networks Sdn Bhd’s 2019-2024 papers saw yields mixed between 4.15% and 4.66% with RM30mil changing hands. Lastly, Jimah East Power Sdn Bhd’s 12/28 and 06/32 paper saw firmer yields between 4.79% and 4.96% with RM30mil traded also.

MYR Interest Rate Swap (IRS) Market

As at Friday’s noon pricing, the 3-month Klibor stood at 3.69%. Elsewhere, the 5-year CDS up by 1.2% to 114.6.