REVIEW: With the US corporate earnings season picking up pace, the domestic equity market has had a hard time holding on to the bullish sentiment.
Investors were seen fleeing to the sidelines in the past week, speeding up the consolidation on the FBM KLCI, amid a potential contraction in corporate earnings.
As has been the case since the start of the US-China trade war, corporate earnings would signal if the dispute is weighing on investments and earnings, suggesting slowing economic growth.
On the technical price chart, the FBM KLCI has rejected the 200-day simple moving average (SMA) and is looking for solace near a lower support.
While the sell-down is a negative development, the retreat to the support serves as a default position in times of caution.
Some profit-taking to the lower end of a trading range prior to the announcement of catalytic decisions shows investors coiled to exit at the first sign of trouble.
For now, optimism remains that the US Federal Reserve will cut rates come end-July.
Analysts have said that a cut of at least 25 basis points (bps) is all but assured, but questions remain if the economy has slowed enough for the central bank to slash its policy rate by 50bps.
Affecting expectations is the introduction of economic data from major economies. Chinese GDP data for the April-June period released on Monday showed Asia’s bellwether economy growing 6.2% from a year earlier.
Although the figure represented the slowest pace of quarterly expansion in 27 years, it came within analyst expectations and indicated that Beijing’s stimulus measures may be taking effect.
Such indecisive data lent mixed feelings to Asian markets, although Bursa Malaysia seemed content with travelling along its consolidation route.
The FBM KLCI put on 2.92 points to 1,672.37 on Monday, in large part owing to a sharp rebound in Tenaga Nasional after a three-day sell-off in the previous week.
Overnight, Citibank would be the first of the major Wall Street banks to announce their quarterly earnings. The bank met the higher end of analyst estimates, leading Wall Street indices to mild gains, but pushing the Dow Jones to a fresh record nonetheless.
Asian markets however factored in the previous day’s release of Chinese GDP and remained at a bearish bias. The FBM KLCI was equally unconvinced and slipped 3.43 points to 1,668.94.
Trade war rhetoric, as has often been the case over the past year, served as the trigger to turn a sideways trading movement into a downward trajectory.
US President Donald Trump throttled hopes of progress in the US-China dispute as he remarked that the two countries have “a long way to go” while reiterating that the US could impose tariffs on another US$325bil worth of Chinese goods.
This ended the advance on Wall Street and sent negative vibes across Asia at Wednesday’s open. The FBM KLCI plunged 11.41 points to 1,657.53 in the first sign that the newsflow for the week was net negative.
The decline continued over Thursday as Petronas Chemicals came under selling pressure after it was downgraded by Citigroup.
Plantation counters including KL Kepong and Sime Darby Plantation also weighed on news that India was considering a move to raise duties on Malaysian palm oil imports.
The index slid 8.6 points to 1,648.93, breaching the support at 1,656 and halting at the 50-day SMA.
On Friday, the FBM KLCI rebounded on the positive retracement of Petronas Chemicals and Tenaga Nasional, both of whom had been on a losing streak over the week.
Statistics: The major index ended the week 11.26 points or 0.7% lower over the previous week, at 1,658.19. Total turnover for the trading week stood at 14.5 billion shares amounting to RM8.97bil compared with 12.89 billion shares worth RM9.92bil over the previous week.
Outlook: The consolidation on the FBM KLCI came a little steeper than expected as it slipped towards the 50-day SMA line near 1,650.
However, Friday’s rebound made sure that the index stayed afloat of the support at 1,656, indicating that investors are not yet ready to give up crucial ground.
Just as much of the index weighting was pulled lower over the week by Petronas Chemicals and Tenaga Nasional, their partial recovery on Friday helped maintain a foothold on the 50- and 100-day SMAs.
However, things are expected to be volatile as the US corporate earnings continue to come in even as we draw closer to the Fed meeting on July 30-31 to discuss policy.
The short-term outlook on the technical charts remain weak although a reversal in the trajectory of the slow-stochastic suggests the negative momentum may be tapering off. A positive crossing is close, but short of a “buy” signal, the indicator continues to offer a bearish view.
The daily moving average convergence/divergence line continues to show a stiff downtrend as it sustains its fall below the signal line.
For the week ahead, the index may be looking at a lower support of 1,626 if it maintains the short-term trend and falls below the 50-day SMA.
In the event of a rebound, the share may test the 200-day SMA and in the event of a breach, tackle the resistance at 1,690.