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Malaysia Market Watch 10th September 2012

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Investors should stay on the sidelines and await clearer signals on the external front from the Federal Reserve’s policymaking committee meeting this week, says a head of research.

BLUE chips on Bursa Malaysia suffered a sell-off last week, which dragged the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) to a fresh two-month low before it stabilised, triggered by foreign fund selling following rating agency Standard & Poor’s warning that the country’s sovereign credit rating could be cut if there is no follow-through on reforms to reduce the fiscal deficit.

A rally on US and European markets, sparked by the European Central Bank’s endorsement of unlimited bond-buying programme and stronger-than-expected US economic numbers helped stocks rebound ahead of the weekend.

The FBM KLCI slumped 21.56 points, or 1.31 per cent, last week to 1,624.55, with losses in CIMB (-29 sen), Maybank (-12 sen), Petronas Gas (-68 sen) and PPB Group (-90 sen) representing nearly half of the index’s fall. Average daily traded volume and value was 1.33 billion shares and RM1.7 billion, compared with 1.27 billion shares and RM1.3 billion in the previous week.

Just a credit downgrade scare among foreign investors was enough to knock 28 points off the benchmark index last Thursday when it fell to a low of 1,613. Imagine if it was a reality!

The contentious point here is whether the debt-to-gross domestic product ratio of above 50 per cent since 2009 will get out of control, if the government continues with its deficit budget. The government’s official budget deficit forecast this year is 4.7 per cent and it aims to reduce it to three per cent by 2015. Achieving this year’s target should not be a difficult feat based on the timely rebasing of our GDP base year to 2005 last May from 2000 previously, which has effectively raised the value of economic activities in real and nominal terms.

For instance, the rebasing has instantaneously reduced 2011 debt-to-GDP ratio to around 50.9 per cent from 53.5 per cent previously and place it at a comfortable distance from the 55 per cent ratio that could be a trigger point for downgrades.

While it is unclear whether this adjustment meant anything for the rating agencies, there is an urgent need in addressing structural issues to improve our long-term fundamentals that could enrich and improve the quality of life of every citizen.

For instance, rationalising fuel subsidies has been long overdue based on Pemandu’s proposal and the same applies to our automotive policy.

As for the benchmark index this week, it is expected to remain on a corrective mode pending clear signs of another round of quantitative easing from the US Federal Reserve, which is scheduled to meet this week to review monetary policy measures. As Fed chairman Ben Bernanke has mentioned that unemployment is a “grave concern”, the below-expectations addition of 96,000 workers in August non-farm payrolls and the still-high unemployment rate of 8.1 per cent boosted the odds for the much-anticipated third quantitative easing, potentially in October.

As highlighted last week, the positive impact on equity markets will not be as significant as the first QE and it will be shortlived as rising inflationary fears would act as the oxymoron as fears about economic slowdown grow stronger.

China, for instance, has announced yesterday that its consumer prices have risen by two per cent for August, which could constrain the government’s ability to react. Only a day earlier, President Hu Jintao said the country faces notable downward pressure with Europe’s debt crisis crimping exports and a property crackdown damping domestic demand. Inflationary pressures will have a dampening effect on the US economic growth as well, which is already under pressure, and the fast approaching fiscal cliff come end-2012 will crimp public spending if Congress does not react fast enough. The impact on Malaysia, which is a trading nation, is a no brainer. We have already seen the impact on our July exports, which contracted by 1.9 per cent versus market expectations for a 3.5 per cent growth.

Technical outlook

In FBM KLCI futures, the new spot month September contract on Bursa Malaysia Derivatives tumbled 33 points, or two per cent, week-on-week, reverting to a 9.55-point discount to the cash index, compared to the 1.9-point premium in the previous week, as short-selling and long liquidations picked up momentum.

Share prices on Bursa Malaysia rose last Monday, lifted by regional gains after weaker-than-expected economic data renewed hopes for imminent stimulus measures to boost growth. The FBM KLCI gained 7.79 points to close at 1,653.9, off a record high of 1,655.49, but losers beat gainers 424 to 360 on total traded volume of 1.49 billion shares worth RM1.68 billion.

Lower liners ended softer on profit-taking while blue chips congested the following day, dampened by regional weakness after Moody’s Investor Service cut the EU’s economic outlook amid China’s recent weaker-than-expected data. The FBM KLCI was stuck in a narrow trading range before ending flat at 1,654.11, as losers beat gainers 440 to 274 on moderate trade totalling 1.33 billion shares worth RM1.42 billion.

Blue chips led a sell-off on the broader market on Wednesday as regional markets suffered the longest losing streak in two months, depressed by weaker-than-expected economic data from the US, China and Australia that raised global growth concerns. The FBM KLCI slid 13.1 points to settle at the day’s low of 1,641.01, as losers swarmed gainers 669 to 156 on total trade of 1.35 billion shares worth RM1.7 billion.

The local market suffered a second bout of sell-off on Thursday, mostly from foreign fund sales sparked by rating agency S&P’s warning that the country’s sovereign credit rating may be cut if there is no follow-through on reforms to reduce spending and the fiscal deficit.

The FBM KLCI slumped 23.02 points or 1.4 per cent, to close at 1,617.99, off a low of 1,613.16, as losers bashed gainers 739 to 157 on total volume of 1.3 billion shares worth RM1.99 billion.

Stocks staged a rebound ahead of the weekend following the strong overnight rally on US and European markets, sparked by the European Central Bank’s endorsement of an unlimited bond-buying programme and stronger-than-expected US economic data. At the close, the index gained 6.56 points to 1,624.55, as 488 gainers led 260 losers on slower trade totalling 1.15 billion shares worth RM1.72 billion.

The trading range for the local benchmark index expanded to 42.33 points last week, compared to the 7.37-point range the previous week.

Among the lower liner indices, the FBM-Emas Index lost 156.86 points, or 1.4 per cent, to 11,072.68, while the FBM-Small Cap Index slumped 297.16 points, or 2.44 per cent, to 11,892.05.

The daily slow stochastic indicator for the FBM KLCI has just dipped into the oversold zone following last week’s correction, while a fresh sell signal was triggered on the weekly indicator in the overbought region. The 14-day Relative Strength Index (RSI) hooked up for a neutral reading at 38.83 helped by last Friday’s mild rebound, but the 14-week RSI turned lower for a reading at 56.89.

The daily Moving Average Convergence Divergence (MACD) trend indicator is deteriorating further to imply weaker trend ahead, while the weekly MACD is poised to trigger a sell signal. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator have crossed for a sell signal while the ADX line has recovered to indicate a developing trend.

Conclusion

Confirmation of the bearish divergence on the 14-day RSI and fresh sell signals on the weekly stochastics and daily MACD indicators for the FBM KLCI implies potential further downside risk for the immediate term.

Investors should stay on the sidelines and await clearer signals on the external front from the Federal Reserve’s policymaking committee meeting this week on the potential for further stimulus measures to boost the global economy, before taking fresh positions.

For the FBM KLCI, immediate resistance would be 1,633, the 50-day moving average, with the 1,655.49 peak of September 3 acting as stronger hurdle. Immediate support will come from last Thursday’s low of 1,613, followed by 1,609, the April 3 peak, with better support seen at 1,591, which is the 50 per cent retracement of the run-up from 1,526.6 on May 18 to the 1,655.49 peak of September 3.

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