REVIEW: A lack of confidence in the domestic market and a potential downgrade in sovereign bonds emerged as the catalyst to push the FBM KLCI towards 2016 lows.
Confidence in local government bonds came under the spotlight on Monday following FTSE Russell’s statement that it had reviewed Malaysia’s debt and was considering removing it from the World Government Bond Index after six months on a watch list.
This came as a second blow to Malaysian bonds as Norway’s sovereign wealth fund had announced a cutting back in emerging market bonds on April 5.
Should Malaysia be excluded from the global index, Morgan Stanley estimated that total bond outflows could reach US$8bil (RM33bil) based on its 0.39% weighting and the estimated US$2tril tracking the index.
“Risk of being pulled out will depend much on our macro fundamentals and also on our market accessibility,” said Ambank Research on Wednesday.
The sell-off in the local currency was swift and the ringgit slid 0.6% on Tuesday. The decline continued over subsequent sessions, with the currency ending 0.5% lower against the greenback over the week at 4.133, which was a return to January levels.
The equity market, already lagging behind regional peers and the worst-performing among major markets in 2019 year-to-date, was jolted by the negative news.
The negative momentum accelerated, pushing the index further below a short-term descending trendline and towards its next support of 1,609 points.
More positive external factors seemed to have taken a back seat in light of the potential impact on the local market.
While Wall Street’s corporate earnings season had put in a mixed-bag of results, global markets were generally heartened by the prospects of the US-China trade war nearing an end.
Asian markets were mostly higher over the week as trade fears receded following comments by Washington that both parties would be subject to enforcement mechanisms, suggesting concessions were being made.
Bloomberg cites sources as saying the negotiators are aiming for a late-May signing of a trade agreement.
Meanwhile, another boon to investor sentiment came with the influx of Chinese data that showed better-than-expected growth, suggesting that Beijing’s stimulus measures may have mitigated the slowdown.
Chinese GDP and trade data that were released on Wednesday beat expectations, giving Asian indices a mid-week boost that offset profit-taking.
While gains were capped by the uncertainty of Wall Street earnings, by and large, the results came in better than expected and the US’s major indices posted weekly gains.
Of course, Malaysia’s stock market was left in the lurch during this course of events.
While the FBM KLCI continued to move in consolidation mode over Monday and Tuesday, the heavy selldown came on Wednesday.
Losing 8.56 points in midweek, the local index saw its most heavily weighted counter Maybank falling 21 sen to RM9. The overall market took a broad-based retreat with decliners overwhelming advancers three to one.
The bloodshed continued on Thursday with the index losing as much as 11 points to the supporting low of 1,609 before a rebound in the afternoon helped pare losses to 1.17 points to 1,619.73.
Bursa Malaysia remained opened on Good Friday and the index rebounded 2.34 points to close the week at 1,622.07.
Offshore funds accelerated their disposal of local equity, turning net sellers every day of the week for a combined net disposal of RM373.6mil over four sessions to Thursday.
Statistics: The major index ended the week 8.1 points or 0.5% lower over the previous week, at 1,622.07.
Total turnover for the trading week stood at 14.13 billion shares amounting to RM9.25bil compared with 17.52 billion shares worth RM11.47bil over the previous week.
Outlook: The FBM KLCI made a rebound on Friday after a dismal week that saw the index testing the 1,609 resistance, effectively putting it at 2016 lows. The positive retracement on Thursday afternoon to end the session at a slight loss after having shaved off 11 points in the morning session, however, suggested the index was ready for some recovery.
Indeed, the 14-day relative strength index (RSI) showed a return from oversold conditions. By Friday, the slow-stochastic had joined the RSI in issuing a bullish signal when the percent K oscillator crossed the percent D oscillator.
It will be a difficult recovery for the index as the 1,626 support has turned resistance and short-term 14- and 21-day simple moving averages (SMA) continue to descend, indicating downwards pressure.
The short-term descending trendline that starts from Feb 22 remains intact and current meets the 21-day SMA.
Moving forward, a return above the 21-day SMA to the round figure of 1,640 would suggest the rebound has grown in momentum while the round figure of 1,660 has emerged as a possible target for a near-term rally.
However, further negative catalysts could see the index return to the 1,609 support, a stiff support that looks unlikely to be breached at the present time.