WITH lingering uncertainty and negative sentiment over the global economy, will there be a Chinese New Year (CNY) rally on Bursa Malaysia?
Momentum appears to be slowly building up, backed by some recovery in sentiment over positive US-China trade talks, a patient Federal Reserve with possible pause in rate hikes, and stronger Chinese stimulus to stabilise the flagging economy.
Optimism in the trade talks is fuelled by speculation that the United States, in turn, may roll back some tariffs on Chinese imports (which was denied) while China is said to work towards reduction of its trade surplus to zero.
But oil prices are slow to react to production cuts by the Organisation of Petroleum Exporting Countries as slowing global demand and surging US output will likely put pressure on prices.
And Bursa Malaysia, as a stock exchange of a commodity producing country like Malaysia, responds to rising oil prices.
Following the more dovish tone from Fed chairman Jerome Powell, there is a growing chorus among Fed officials for patience and caution.
In an about-turn, leading hawk Kansas City Fed president Esther George, called for a “pause in the normalisation process” to assess the impact of earlier rate hikes.
Also requiring further study is the impact of the Fed’s reduction of its swollen balance sheet following massive bond purchases in the wake of the 2008 financial crisis.
Complaints of over-tightening involved not only rate hikes but also the aggressive pace of balance sheet reduction which is on autopilot.
Dallas Fed president Robert Kaplan advocated patience for “months, not weeks,” as financial conditions have tightened, global growth slowed and some cyclical industries (such as housing and auto) are showing early signs of weakness.
Minneapolis Fed president Neel Kashkari saw no reason for putting on the brakes pre-emptively.
There is a lack of clarity, if there will be a pause in rate hikes, and for how long.
“What is holding back momentum on Bursa is the inability of oil prices to climb, signaling that Powell’s capitulation (from aggressive rate hikes and that rates are a long way from neutral) is too little and too late, to rescue markets from eventually turning down again,” said Pong Teng Siew, head of research, Inter-Pacific Securities.
“It may be a CNY rally that builds up only slowly.”
Further progress in trade talks, which will resume at the end of the month, may help spur a rally, said Danny Wong, CEO, Areca Capital.
Optimism in the consistent roll-out of stimulus in the China economy will, to a certain extent, help to lift markets while awaiting the outcome of trade talks.
“This is expected to ease investors’ concerns over the slowing China economy which was already dented by the ongoing trade spat with the United States,” said Lee Heng Guie, executive director, Socio Economic Research Centre.
Stimulus on drip-feed adopted last year, when the Chinese government was trying to balance stimulus with deleveraging, were not effective, and beefed up measures this year included forcing banks to lower lending rates for smaller companies.
China also injected a record 560 billion yuan (US$83bil) into its financial system to shore up liquidity.
For the fifth time, China lowered the level of reserves to be set aside by commercial banks, to encourage lending to smaller businesses.
While additional stimulus will help to maintain growth and give markets in China a better footing, efforts to keep the money markets liquid are also positive, noted Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank.
China may deliver two trillion yuan (US$296.21bil) worth of cuts in taxes and fees, and allow local governments to issue another two trillion yuan in special bonds to mostly fund infrastructure projects, said CNBC, quoting analysts.
While a lot more stimulus measures may be expected from China as it works to avoid a hard landing, expecting an economy with Gross Domestic Product of US$13 trillion to keep growing at 6% may be too much.
Still, a deepening and potentially abrupt slowdown in this powerhouse may alarm markets further and affect multi-interlinked businesses globally.
China had rescued the world from the 2008 financial crisis, through its US$586bil stimulus.
Its recent measures can have a positive effect on the global economy but their impact may be less long lasting and less effective than the post financial crisis stimulus.
Until the trade war is resolved, consumer confidence cannot be easily restored.
The robust US consumer sector already saw a tumble in sentiment in early January to a two-year low, signaling possible caution on spending.
The sustainability of markets rebounding from December lows remains challenging, as undercurrents spell of potential weakness ahead.
Columnist Yap Leng Kuen notes the rocky path ahead for markets and economies.