TRUMP-XI TRUCE TO BE UPSIDE CATALYST?

THE FTSE Bursa Malaysia KLCI (FBM KLCI) went through highly choppy trade last week, with hopes for easing trade tensions by the world’s top economies at a Group of 20 (G20) meeting and a more dovish tone from the United States Federal Reserve (Fed) on interest rates dashed by heavy losses led by key gaming and oil and gas (O&G) stocks.

The selloff was sparked by Genting Malaysia’s suit against Walt Disney and 21st Century Fox following the latter’s termination of a theme park contract in Genting Highlands, while selling pressure intensified on concerns over weak corporate earnings due to the slump in oil prices.

The FBM KLCI shed another 16.02 points, or 0.95 per cent, to 1,679.86, with gains on Nestle (+RM1.90) and IHH Healthcare (+57 sen) offset by losses in Petronas Dagangan (-RM1.10), Genting Malaysia (-73 sen), Genting Bhd (-61 sen), Tenaga (-56 sen) and Sime Darby (-48 sen). Average daily traded volume last week rose to 2.17 billion shares worth RM2.63 billion, compared with 1.74 billion shares valued at RM1.51 billion in the previous week, with most of the trades coming from Friday’s late afternoon session.

The Nikkei Malaysia PMI and trade data, which are due today and on Wednesday, respectively, could shed some light on the impact of the trade war and ringgit weakness.

China’s Caixin PMI data will be closely watched this week after the official manufacturing and non-manufacturing numbers on Friday indicated activities in the world’s second largest economy are slowing.

Similarly, PMI and ISM data are due in the US this week apart from employment data. However, the focus will be on the outcome of a meeting between US President Donald Trump and his China counterpart Xi Jinping held on Saturday.

Trump and Xi agreed to a ceasefire in their bitter trade war after the high-stakes talks, including to no escalated tariffs on January 1. This could be the initial catalyst to a year-end rally that could be supported further by any production cut by Organisation of the Petroleum Exporting Countries (Opec) next month.

Although oil prices have weakened, Petroliam Nasional Bhd (Petronas) should be able to honour its commitment to paying RM26 billion dividend this year as its net profit in the first nine months rose 41 per cent to RM34.4 billion.

Even if the Opec cut does not materialise and Petronas can’t fulfil the commitment, Malaysia can still fall back on its asset divestment plan to make ends meet next year. Khazanah Malaysia Bhd has divest a 16 per cent stake in IHH Healthcare Bhd for RM8.4 billion and is expected to dispose of more non-strategic holdings in banks, telcos, as well as property and infrastructure companies.

Technical outlook Buying support on selected heavyweights lifted the key index to close at the day’s high on Monday, but the broader market extended sideways consolidation as cautious sentiment persisted. The FBM KLCI ended 6.11 points up at 1,701.99, off an early low of 1,688.45. Losers edged gainers 452 to 354 on turnover of 1.74 billion shares worth RM1.41 billion.

Local stocks slumped the next day with the key index tumbling 17.02 points to end near-session lows at 1,684.97 on higher turnover totalling 2.18 billion shares worth RM2.61 billion. Sharp losses in Genting Malaysia and Genting Bhd exacerbated the falls.

Stocks recovered on Wednesday as local institutional funds returned to nibble in heavily bashed blue chips. The FBM KLCI inched up by 1.58 points to close at 1,686.55 on reduced turnover of 1.66 billion shares worth RM2.11 billion.

Shares rose the subsequent day in line with regional gains following the overnight US rally on expectations that Fed may restrain its rate hikes next year. The FBM KLCI gained 9.79 points to close at 1,696.34 on total turnover of 2.16 billion shares worth RM2.44 billion.

Selling pressure resumed in late afternoon trade on Friday, with key O&G, plantation and banking stocks leading the fall on concerns over weak earnings. The index tumbled 16.48 points to close near-session lows at 1,679.86, off an early high of 1,702.98, as losers beat gainers 614 to 273 on robust turnover of 3.09 billion shares worth RM4.55 billion.

Trading range for the FBM KLCI was at 25.53 points last week, with the week’s high-low range established on Friday.

The daily slow stochastics indicator for the FBM KLCI rehooked downwards again, depressed by Friday’s selloff, while the weekly indicator deteriorated into oversold territory.

The 14-day Relative Strength Index (RSI) indicator also hooked back down for a more bearish reading of 38.28 due to last Friday’s weak closing, while the 14week RSI indicator slipped to a weaker reading of 35.77.

The daily Moving Average Convergence Divergence (MACD) trend indicator’s trigger line declined back towards its signal line, while the weekly MACD remained bearish to suggest further correction ahead. On the 14day Directional Movement Index (DMI) trend indicator, the +DI and -DI lines expanded negatively on a falling ADX line, signaling further weakening of trend.

Conclusion

Given further deterioration on technical momentum and trend indicators, investors can expect more downside volatility, at least in the early part of this week. Nonetheless, the Trump-Xi “truce” on Saturday could be a good upside catalyst to prevent further correction ahead.

On the index, crucial supports from the October 25 low of 1,670 and 1,657, the June 28 pivot low, must hold to prevent further downside correction risk towards 1,617, the 123.6 per cent Fibonacci Projection (FP) level. Next crucial support below will be 1,593, the 138.2 per cent FP.

On the upside, immediate resistance will be at 1,700, with tougher upside hurdles remaining at 1,722, 1,742 and 1,762, the respective 61.8 per cent FR, 50 per cent FR and 38.2 per cent FR of the rise from 1,657 low on June 28 to the 1,826.9 high on August 28.

Given further deterioration on technical momentum and trend indicators, investors can expect more downside volatility, at least in the early part of this week.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.