Weak outlook at 1,600 mark

REVIEW: The FBM KLCI clung stubbornly to the 1,600 mark, ending just a fraction of a point under by yesterday’s close.

After sharp falls over the week, which came on the back of compounding evidence that the global economy was not in good order, the index has managed to return to the psychological level to stem its fall at fouryear lows.

Similar to a bearish breach of the support in May this year, there was a partial recovery soon after.

However, given growing negative pressure, it remains to be seen if the market can hold on over the coming sessions. Recession fears have grown stronger given the weak data coming from major economies such as China and Germany this week. The slowdown in China’s economy had become more apparent with a jobless rate rising to its highest level in July and industrial production growing at its slowest pace since 2002

Germany’s economy, meanwhile, showed a quarterly contraction as exports slumped, with output slipping 0.1% between April and June. With analysts forecasting another quarter of contraction, the economy would be headed into a technical recession. SouthEast Asia’s bellwether economy, Singapore, cut its forecast for the second time this year.

The Trade and Industry Ministry now expects GDP to grow at 0-1% for 2019 from 1.5%-2.5% predicted in May.

Coming out of a long weekend on Tuesday, the FBM KLCI tracked an overnight route in US markets and tumbled at the opening bell. The index fell 22.17 points to reach below 1,600 for the first time in the week, ending at 1,592.88. The US-China trade war seen as a major headwind pushing the global economy into an economic slump.

Since the announcement of additional US tariffs, equity markets have been in thrall of the looming September deadline where a 10% tax would be imposed on US$300bil of Chinese goods. So it came as some relief that on Tuesday night, the White House announced a delay in the new tariffs on a list of Chinese consumer goods to Dec 15, giving the trade discussions more time to bear fruit. The rebound in global markets was immediate, with the Dow Jones retracing nearly all of its losses from the previous session and the S&P 500 and Nasdaq putting on strong gains of 1.5% and 2% respectively

This helped to trigger the rebound on the local market, with the FBM KLCI returning to the 1,600-point mark. Gains were capped by the release of disappointing Chinese economic data, but developments over the trade war proved to be the foremost concern among investors.

The reprieve was fleeting as the US and European mark trading sessions would reveal bloodshed on recession fears. Both UK and US government bond yields inverted, which meant traders were accepting lower yields for bonds with longer maturity dates, suggesting a lack of confidence in the economy.

The Dow Jones plunged 800 points, the fourth-largest point-value in the index’s history while the FTSE 100 fell to its lowest close since March

The rout came swiftly on Bursa Malaysia at its Thursday open, gapping down and losing over 18 points at its lowest point of the day.

However, the market managed to recover in the afternoon session, with late buying of bargain counters taking the FBM KLCI back to its starting line at 1,600.29.Similarly on Friday, a 10-point fall in early trading was nearly erased by the end of market day, supported in part by a better-than-expected second-quarter GDP result of 4.9%

Statistics: The major index ended the week 15.83 points or 1% lower over the previous week, at 1,599.22. Total turnover for the four-day trading week stood at 8.33 billion shares amounting to RM6.64bil compared with 12.45 billion shares worth RM10.1bil over the previous week.

Outlook: The FBM KLCI’s late-afternoon pushes towards the 1,600 line shows some resilience in the market as investment funds take to picking up oversold stocks. However, the outlook remains weak moving forward.

With the consolidation taking place, the technical indicators are showing mixed signals.

The slow-stochastic has grown more bullish as the percent K oscillator crosses above the percent D oscillator to trigger a “buy” signal. This comes in tandem with the 14-day relative strength index briefly crossing above the oversold line before returning under.

The daily moving average convergence/ divergence line still maintains a negative outlook despite flattening out somewhat to suggest that the downtrend is losing steam.

On the daily price chart, the descending trend line remains firm and coupled with downward pressure from the overhead simple moving averages, the short term outlook for the index remains negative.

If the consolidation seen in the later part of this week continues into the next or if negative pressure takes hold, we could be seeing the index drift closer towards the support of 1,570 (rounded down) and 1,550 below that.

A solid penetration of 1,600 over the coming sessions may take the index to firmer ground at its next resistance at 1,625.

Global Forex Market

THE dollar rebounded this week, up 0.67% to 98.144 supported by better-than-expected economic data release i.e.: (1) retail sales accelerating by 0.7% m/m in July from 0.3% m/m in June (cons: 0.3%); (2) NY Empire State Manufacturing Index expanding to 4.8 points in August from 4.3 points in July (cons: 3.0); (3) July inflation rising 0.3% m/m from 0.1% m/m in June (cons: 0.3%); and (4) July core inflation growing steadily by 0.3% m/m, unchanged from June (cons: 0.2%).

Besides, the dollar’s momentum was partly supported by safe-haven flows following weak economic data from both China and Germany suggesting a potential slowdown in global growth, negating hopes that US-China trade talks were making progress. Earlier this week, Washington announced its plan to defer some of the tariffs on US$300bil worth of Chinese goods that were originally scheduled to come into effect on Sept 1 to Dec 15.

Brent crude oil lost 0.51% at US$58.23/bbl especially after the EIA reported a surprise crude oil stockpiles by 1.58 million barrels for the week ending Aug 9 (cons: -2.775 million) coupled with the weight of China’s trade threats and uncertainty over Brexit, as well as higher output of US shale oil.

The euro depreciated 0.83% to 1.111 following the disappointing industrial production figure that shaved off 2.6% y/y in June from 0.8% y/y gains in May. Also, 2Q2019 GDP second estimation merely grew 0.2% q/q from 0.4% q/q in the 1Q2019. In addition, the euro was partly weighed by the rising concern on the Italian deputy prime minister’s threat to bring down the coalition government, citing loss of faith in the coalition.

The pound strengthened 0.46% to 1.209 fuelled by the better-than-expected retail sales figure of 3.3% y/y in July from 3.8% y/y in June (cons: 2.6%) suggesting consumers continued to take Brexit in their stride, helped by modest inflation at 2.1% y/y in July from 2% y/y in June while core inflation inched up slightly by 1.9% y/y from June 1.8% y/y. Also, wages were growing at their fastest rate in 11 years by 3.9% y/y in June from 3.6% y/y in May (cons: 3.8%). This brings the real wage growth to 1.9% y/y in June from 1.6% y/y in May. On a side note, June’s unemployment rate ticked slightly higher to 3.9% y/y from 3.8% y/y in May.

The Japanese yen weakened 0.41% to 106.12 partly due to the decline in industrial production by 3.8% y/y in June from -2.1% y/y in May (cons: -4.1%), reaffirming that the trade tension continues to take a toll on factory activities. Japan’s 2Q2019 preliminary GDP recorded a growth of 1.8% q/q annualized, beating estimates of 0.4% while 1Q2019 GDP figure was revised to 2.8% from 2.2%.

The majority of Asia ex-Japan currencies weakened against the dollar save for the yuan and Hong Kong dollar. The yuan rose by 0.4% to 7.034 as President Trump delayed new tariffs on certain consumer items. Meanwhile, the Philippine peso came in as the worst performer for the week, falling 1.35% to 52.61 against the dollar due to fears risk-off environment.

Lastly, the Singapore dollar weakened by 0.28% to 1.389 due to rising speculation that the central bank will ease its monetary policy in October.

Amidst a short-working week in view of the Hari Raya Aidiladha celebration, the ringgit depreciated 0.25% to 4.195 owing to a stronger dollar.

The FBM KLCI pared losses, shedding 0.9% to settle at 1,600.3 while recording a net foreign outflow of RM495.2mil. On the data front, 2Q19 GDP print accelerated to 4.9% y/y from 4.5% in 1Q19 (cons: 4.8%), supported by a firm rebound in the mining, manufacturing and construction sectors.

Moreover, headline inflation eased to 1.4% y/y in July from 1.5% y/y in June contrary to core inflation that rose 2% y/y in July from June’s 1.9% y/y.

US Treasuries (UST) Market

The risk-on mode was short-lived on growing signs of mounting economic anxiety after Germany recorded a contraction in 2Q19 GDP (-0.1% q/q from 0.4% q/q in 1Q19), added with softer China’s industrial production at 4.8% y/y in July from 6.3% y/y in June, the lowest since 2002. As a result, investors scrambled for yields with the UST10-year easing as low as the 1.55% levels while UST30 year touched 2.00%, marking a record low. In addition, appetite for bonds grew further after the UST10Y/2Y inverted for the first time since 2007, fuelling further speculation of an impending recession given it has been a reliable recession indicator in the past.

As at Friday, the 2-, 5-, 10- and 30year benchmark UST yields stood at 1.51%, 1.44%, 1.55% and 2.00%, respectively.

Malaysian Bond Market

The local govvies market experienced a flurry of buying over the week due to concerns over the escalation in the trade war. The MGS yields eased 12.4bps on average while the GII yields fell 4–18bps. On top of that, 2Q2019 GDP print came in better-than-expected at 4.9% y/y from 4.5% y/y in 1Q2019.

Also, the highlight of the week was the 20Y MGS ‘06/38 reopening auction on top of RM3.0bil excluding RM1.0bil of private placement. The auction closed with a very strong BTC at 3.150x.

Post-auction, buying demand for the long ends continued as the bond dropped another 5bps. As at Friday noon, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 3.18%, 3.19%, 3.22%, 3.23%, 3.39%, 3.53% and 3.69% respectively.

Local govvies activities jumped 40% to RM18.0bil from last week’s RM12.8bil. Matching the pace, the MGS papers surged 221% w/w to RM10.8bil from RM3.4bil, recording 60% of the total volume traded as compared with 26% in the prior week. In contrast, interest in the GII dropped 27% to RM6.9bil from RM9.5bil, occupying 38% of the week’s flows. We also noticed Sukuk Perumahan Kerajaan (SPK) papers back on the trading floor at RM200mil while MTB/MITB was traded as much as RM90mil during the week.

The secondary market was lacklustre, down by 47% w/w to RM2.7bil from RM5.1bil a week earlier. The GG/AAA segment contributed 60% of the PDS flow, the AA-segment by 36% while the A-paper made up 4%.

The GG/AAA-segment saw Danga Capital Bhd 2020–2033 tranches gobbling up RM460mil and traded between 3.210% and 3.814%. Besides, Cagamas Bhd 2022–2022 tranches gathered RM310mil with yields closing between 3.231% and 3.500%. These were followed by DanaInfra Nasional Bhd IMTN 2027–2039 papers which traded 3.478%–3.851% with a volume of RM275mil.

Meanwhile on the AA-segment, Public Bank Bhd 2027–2028 sub-notes topped the list with RM225mil changing hands at 3.751%–3.850%.

Next, ‘12/22 and ‘09/25 Fortune Premiere Sdn Bhd IMTN papers gathered RM102mil and traded at 3.927% and 3.974%, respectively. Last but not least is the ‘06/25 Benih Restu Bhd issuance which was traded at 3.918% amounting to RM100mil.

MYR Interest Rate Swap (IRS) Market

The IRS was seen easing across the curve with the 10-year gaining the most at 7bps while the 3-month KLIBOR remained unchanged at 3.46%. Elsewhere, the 5-year CDS rose 7.9% to 62.08bps.