PETALING JAYA: The FBM KLCI’s near-term direction hinges on signals from the Federal Reserve (Fed) this month, with market watchers saying the US central bank’s guidance on interest rates will set the tone for global fund flows.
While markets largely expect the Fed to keep rates unchanged at its upcoming policy meeting, experts said the tone of its guidance, rather than the rate decision itself, will be closely watched for clues on the future path of monetary policy.
They said the Fed’s outlook will continue to shape capital flows, currency movements and sentiment towards emerging markets, including Malaysia.
Uncertainty over inflation, partly driven by higher oil prices amid Middle East tensions, remains a key risk that could reinforce a “higher-for-longer” stance by the US central bank.
Closer to home, market observers are monitoring the political landscape, with the Johor state election expected to offer fresh clues on the timing of the 16th General Election (GE16) and its implications for market sentiment.
Tradeview Capital chief investment officer Nixon Wong Gok Hey said investors are focused less on the Fed’s rate decision itself, and more on its forward guidance.
“Everyone is closely watching the June Federal Open Market Committee (FOMC) meeting and whether persistent inflation forces the Fed to maintain a hawkish stance or even consider further tightening,” he told StarBiz.
The Fed has maintained its benchmark interest rate at a target range of 3.5% to 3.75% for three consecutive meetings in 2026.
Prior to the pause, the US central bank embarked on a rate-cutting cycle in 2025, lowering rates by a cumulative 75 basis points from a peak range of 4.25% to 4.5%, including its most recent 25-basis-point reduction in December 2025.
A Bloomberg survey of 73 economists showed a median expectation that the Fed will leave the federal funds rate unchanged at the 3.5% to 3.75% range when it announces its next FOMC decision on June 17.
Wong said the situation in the Middle East also warrants close monitoring, as supply disruptions could push oil prices higher, increase global inflationary pressures and keep interest rates elevated for longer.
He said any further tightening could push US bond yields higher, attracting capital back to the United States and potentially weighing on emerging markets, including Malaysia.
In the medium term, Wong said the ringgit’s performance, progress on key government initiatives such as the National Energy Transition Roadmap, as well as the timing of the next general election and upcoming earnings season, would continue to influence the local bourse.
He pointed to the ongoing artificial intelligence (AI)-driven rally as a key source of optimism across Asia, particularly for semiconductor and data centre-related stocks.
Against this backdrop, IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan said the technology sector is expected to remain a key driver of Malaysia’s capital market performance over the next six months, supported by the global AI investment cycle.
Although the Bursa Malaysia Technology Index has already gained more than 30% year-to-date, he said continued AI-related investment should sustain interest in semiconductor and electronics-related firms.
On the domestic front, Mohd Sedek said resilient private consumption, supported by a healthy labour market, steady wage growth and manageable inflation, should continue to underpin earnings growth in consumer, retail, banking and services sectors.
However, he cautioned that the higher-for-longer US interest rate environment remains a key risk.
“Our base case is that the Fed maintains interest rates at current levels for longer than markets previously anticipated,” he said, adding that this could continue to support the US dollar and encourage selective capital flows into developed markets.
Still, Mohd Sedek said he remains “constructive” on the market outlook, citing improving global risk appetite and the absence of major new trade policy disruptions.
“Combined with continued global equity market strength and improving risk appetite, this should support a more favourable investment environment for the FBM KLCI in the near term, although volatility arising from geopolitical developments and global monetary policy expectations cannot be ruled out,” he said.
Yesterday, the FBM KLCI fell 0.6%, or 10.3 points, to close at 1,672.74.
Mohd Sedek expects the FBM KLCI to reach 1,720 to 1,750 by the end of the third quarter (3Q) of 2026 and 1,760 to 1,780 by end-2026, with a potential upside of 1,800 under a more favourable scenario, driven by sustained foreign fund inflows and stronger global risk appetite.
Despite strength in global equity markets, he said the FBM KLCI is likely to lag regional peers due to its defensive composition, with heavier weightings in financials, utilities, telecommunications and consumer stocks, rather than high-growth technology names.
He added that investors may consider selective profit-taking in 3Q as markets could enter a consolidation phase after recent gains.
Looking ahead, Mohd Sedek flagged two key risks – the possibility of GE16 in late 2026, which could introduce policy uncertainty, and any sustained rise in energy prices due to geopolitical tensions in the Middle East.
“Overall, while we remain constructive on the medium-term outlook, we expect market gains to become more measured as investors balance improving risk appetite against emerging macroeconomic and political uncertainties towards the latter part of the year,” he said.
Apex Research said near-term market sentiment is expected to remain cautiously constructive supported by improving global risk appetite following record highs in US equities, driven by continued enthusiasm over AI-related investments.
However, it said volatility is likely to persist amid geopolitical tensions, uncertainty over US-Iran relations and key US labour data due this week, which will shape expectations for the Fed’s policy direction.
“Domestically, we expect the FBM KLCI to remain range-bound as cautious regional sentiment and mixed foreign fund flows continue to limit upside momentum despite the improving external backdrop.”
It noted that the FBM KLCI fell 38.95 points, or 2.3% month-on-month, in May 2026, weighed by GE16 speculation, weaker regional sentiment and continued foreign fund outflows from Asean markets.
Domestically, investors are also watching the Johor state election following the dissolution of the state assembly on June 1, with polling expected within 60 days.
Apex Research said the Johor election should be viewed not just as a state contest, but as a proxy for national political sentiment ahead of GE16.
While it expects Barisan Nasional (BN) to retain control of Johor under its base case, the broader significance lies in implications for GE16 sentiment.
“A stronger-than-expected performance by either BN or Pakatan Harapan could revive discussions of an earlier general election, while a meaningful PN (Perikatan Nasional) breakthrough would likely encourage the unity government to maintain the current parliamentary term.”
Prior to the dissolution, BN held 40 of the 56 seats in Johor, giving it a two-thirds majority.
Nevertheless, Apex Research said political risks remain manageable and are unlikely to materially alter government policy in the near term.
It added that downside in the market is likely to be cushioned by resilient domestic consumption, ongoing data centre and infrastructure investments, and strength in export-oriented sectors, particularly technology and electrical and electronics supply chains.
The research house maintained its FBM KLCI year-end target at 1,787.
