Three fac­tors that af­fect the mar­ket

The Star Malaysia - StarBiz - - Market Watch - Mar­ket trend FONG MIN YUAN star­biz@thes­tar.com.my

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.

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