Oil prices, rate cuts fail to excite market

REVIEW: An unexpected disruption to the world’s global supply of crude oil sent investors on a flurry of speculation in the week’s opening gambit, taking the attention away from policy decisions by major central banks that had been slated to be the focus.

The attack on Saudi Arabia’s crude facilities over the weekend disrupted up to 5% of the world’s global supply of oil, lending a sharp blow to economic growth prospects.

With oil prices soaring as much as 20% and Brent breaking the Us$70-a-barrel mark in Monday trading, stock markets retreated on speculation over its future supply to fuel the growing economy.

However, oil-producing economies such as Malaysia experienced an upside from the oil price recovery. As Bursa Malaysia resumed trading on Tuesday, Petronas Chemicals jumped nearly 5% while Petronas Dagangan rose by 0.5%.

NON-FBM Klci-linked oil and gas counters Sapura Energy, Hibiscus Petroleum and Bumi Armada were also experiencing bullish action on high trading volumes.

There was a positive effect on the FBM KLCI, which rose 3.05 points to 1,604.3.

Trading volume on Bursa Malaysia was also spurred by the unexpected catalyst, jumping to 2.7 billion shares valued at Rm2.18bil compared to 2.1 billion shares worth Rm1.5bil on the previous Friday

However, the White House was expedient in countering the disruption and authorised the release of the United States’ emergency crude reserves to mitigate the supply shortfall and ending the price surge.

Concomitantly, Saudi Arabia managed to partially restore production at its damaged facilities and announced a faster-than-expected timeline to complete recovery.

In fact, by Wednesday, the oil and gas counters had already begun their descent as it became more clear that the supply disruption would be short-lived.

Profit-taking on Petronas Chemicals served as an indicator of the growing calm following investors’ knee-jerk reaction in the previous session. The threat remained however of retaliatory measures by Us-saudi Arabia against the perpetrators of the attacks, which Yemen’s Houthi rebels have laid claim to, even as others point to Iran.

On Friday, a Saudi-led coalition destroyed strategic targets north of the Yemeni port of Hodeidah.

Meanwhile, the White House ordered new sanctions against Iran while promising to rally support against the Middle Eastern nation at the UN General Assembly against the nation. The prospect of further military action or war remained on the books, lending a risk premium to oil prices, which continued to hover about 5% above pre-shock levels.

A sudden increase in oil prices however had investors renewing their bets over the coming Fed decision. Rising oil prices meant increased chances of inflation, which reduced the case for a deeper 50bps interest rate cuts. Late Wednesday night, it was announced that the central bank had implemented another 25 bps cut to the interest rate citing fears of a potential global slowdown.

The ringgit moved lower against the greenback despite the rate cut as the 25bps reduction was widely anticipated, while the growing split among Fed members suggested that a further cut late this year was increasingly unlikely.

Easing measures by other key central banks would prove to be conservative as Japan held its monetary policy steady while Beijing trimmed its one-year loan prime rate by a marginal 5 bps.

On Friday, the FBM KLCI managed to snap its losses as investors picked up stocks in the closing minutes, ending the day 1.13 points higher at 1597.41.

Statistics: The major index ended the week 3.84 points or 0.2% lower over the previous week, at 1,597.41.

Total turnover for the four-day trading week stood at 10.1 billion shares amounting to Rm8.57bil compared with 8.52 billion shares worth Rm6.95bil over the previous four-day week.

Outlook: Despite a promising start to the week owing to the jump in oil prices, the positive catalyst for Bursa Malaysia proved to be short-lived.

As crude oil markets stabilised, so did the FBM KLCI retrace its earlier gains and hopes of a break out of the ongoing consolidation failed. Monetary easing by the US Fed also failed to inspire positive moment on the local market as US policymakers fell short of committing to continued rate cuts. By yesterday’s close, the index was trading below all the key SMAS with the 14- and 21- day SMAS converging at the 1,600-point mark.

The 50-day SMA continues falling below the 100-day SMA, suggesting a growing negative outlook for the share.

The technical indicators indicate bearish signals with the slow-stochastic descending to show falling momentum while the daily moving average convergence/divergence line also shows a negative trend.

With few catalysts over the horizon that could break the current trading channel, the FBM KLCI can be seen moving in its sideways direction for the near term

Support for the index rests at 1,570 with further support at 1,550. Resistance remains at 1,625 and 1,660.