Signs of further consolidation


 

REVIEW: At press time, the world’s equity markets appear consoled that the US Federal Reserve is likely to implement a policy rate cut as early as July 31, and confidence is rising.

In his testimony to Congress late Wednesday, Fed chairman Jerome Powell said US business investments had slowed notably over the uncertain economic environment and that “many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened”.

This came as the strongest signal from the Fed so far that a rate cut would soon follow.

By Friday, CME FedWatch Tool’s expectations for a 25bps rate cut stood at 78.6% while the chances for a 50bps cut rose to 21.4%. According to the forecaster, the chances of an easing come July was all but guaranteed.

At stake is the prospect of a return of investments to riskier assets in emerging markets and currencies, which had served almost single-handedly to overturn the previously negative outlook on the FBM KLCI.

From Monday’s opening bell, signs of consolidation on the domestic market were seen in the lead-up to Powell’s testimonial.

While taking a step back from the 1,690 resistance it had failed to convincingly breach in the prior week, the daily price chart maintained a bullish outlook.

The resilience in the market was most evident from its performance at the start of the week, when Asian markets were routed following a better-than-expected US payroll report that threatened hopes for US easing.

The FBM KLCI joined equity markets across the region in a sea of red but managed to keep the decline to a relatively low 4.98 points of 0.29% to 1,677.64.

Other South-East Asian markets kept to similarly low losses while Asia’s bellwether indice, the Shanghai Composite Index, by comparison, fell a whopping 2.5%.

The major Asian markets continued to slip over the Tuesday session as investors cut back on their expectations for a Fed rate cut.

However, the Malaysian equities benchmark bucked the trend, erasing losses from the previous session. At market close, the index was up 5.23 points to 1,682.87, holding close to the 200-day SMA line in a show of investor optimism.

Meanwhile, Wall Street was also showing waning confidence. The Dow Jones slipped slightly for a third day in a row ahead of Powell’s speech as more investors fled to the sidelines while the Nasdaq and S&P500 eked out marginal gains.

The FBM KLCI continued to make slight losses on Wednesday (-3.9 points, 1,678.97). The index slipped under the 200-day simple moving average (SMA), but given its continued proximity to the line, the negative breach was not significant but rather showed an enduring strength at the support.

When Powell finally delivered his speech, which all but threw the doors open for a rate cut in July, the FBM KLCI was seen stabilising.

Asian markets picked up on Thursday although a rally was noticeably absent from Bursa Malaysia given its relatively steady performance over the week. By the end of trading, the index had retraced its earlier losses and ended 0.29 points in the positive.

On Friday, the index was weighed down by heavyweight CIMB as major shareholder Khazanah Nasional proposed an issue of exchangeable bonds in the banking group.

Regional equities in general began to waver as investors stood back after factoring in a July US rate cut and re-focused on China trade data and the next development in the ongoing trade war.

By market close, the FBM KLCI showed the clearest sign that the uptrend was sputtering, closing 9.81 points lower at 1,669.45

Statistics: The major index ended the week 13.08 points or 0.8% lower over the previous week, at 1,669.45. Total turnover for the trading week stood at 12.89 billion shares amounting to RM9.92bil compared with 14.56 billion shares worth RM10.22bil over the previous week.

Outlook: The FBM KLCI slipped below the ascending trend line following the consolidation phase over the past week. While this means the advance has halted for now, the outlook remains positive given that the index has taken on a sideways trading mode and remains afloat of the support.

The retreat came in tandem with the slow-stochastic falling below 30 points and creeping towards the oversold line.

The daily moving average convergence/divergence line also showed a declining trend, suggesting that there may be more losses over the coming week before things turn bullish.

Nevertheless there remains some room before the share hits the support, which remains pegged to the 100-day SMA at 1,656.

A bounce off the support could see the index attempt another challenge of the 1,690 mark, and in breaching it, rise towards a higher target of 1,709.

Should the support of 1,656 fail however the index could approach further support of 1,626. This would also signal the end of the current bullishness and a return to a negative outlook.


   

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