Any rebound may be weakened by foreign selling

SUBDUED SENTIMENT: US dollar strength expected to underscore near-term bearish outlook

Weak buying momentum implied that any technical rebound attempts should be fleeting. The uncertain near-term trend in oil price and ringgit should also discourage investors from establishing firmer commitments.

SUSTAINED foreign fund sales in key blue chip and the weak ringgit was temporarily offset by local fund buying support early last week but was overwhelmed by persistent foreign selling and the weaker ringgit as fears of more aggressive United States interest rate hikes prevailed to discourage buying.

The uncertainty over changes in trade and economic policies by the new US government next year also acted to depress trading sentiment ahead of the weekend.

Week-on-week, the FTSE Bursa Malaysia KLCI (FBM KLCI) slid another 10.39 points, or 0.64 per cent, to 1,623.8, as gains on Petronas Dagangan (+28 sen), Genting Bhd (+17 sen) and AmBank (+16 sen) were offset by losses on BAT (-84 sen), Petronas Gas (-70 sen), CIMB (-20 sen) and Sime Darby (-16 sen).

Average daily traded volume and value last week dwindled to 1.46 billion shares and RM1.75 billion, compared with the 1.77 billion shares and RM2.14 billion the previous week, as trading sentiment weakened due to the sustained foreign selling activity.

The strength of the US dollar and foreign selling will underscore the near-term bearish outlook for the local market as investors cash out in anticipation of sustained weakness in ringgit.

This uncertainty is compounded further by the disparity between the offshore ringgit non-deliverable forwards (NDF) and onshore ringgit.

Bank Negara is trying to put a lid on this by instructing local banks to quit using NDF as reference rate and getting commitment from the foreign banks operating in Malaysia from trading ringgit in the offshore market.

Instead, it has been encouraging investors and corporations to meet their hedging requirements by trading in onshore forwards that use reference price derived from banks.

Although this move can succeed if there is sufficient liquidity and the onshore forwards are able to truly reflect market dynamism in pricing, equity market volatility will persist in the near term until investors are convinced.

To add to the woes, the ringgit weakness will be amplified if the central bank cuts its Overnight Policy Rate to propel economic growth in Wednesday’s meeting, as predicted by some.

For a start, Malaysia’s inflationary pressure is still tame at 2.2 per cent in the first nine months of this year.

The consumer price index (CPI) data for October that will be released on Friday is expected to show a benign inflation of 1.5 per cent, based on consensus estimate, at par with the previous month.

Thus, if investors believe economic growth will take priority over other matters, they could remain on the sidelines pending more clarity from the policy meeting.

Nonetheless, the central bank is likely to stay pat throughout this year, as per consensus expectations, and maintain its focus on relative strength of the ringgit to curb excessive fund outflows after the selling in the bond market pushed the 10-year Malaysian government securities (MGS) yield closer to 4.5 per cent last week.

Bank Negara is also due to announce its foreign reserves for mid-November today, that should reflect some weakness in US dollar terms as it defended the ringgit. This could affect sentiment.

On the external front, the minutes of this month’s Federal Open Market Committee (FOMC) meeting is due for announcement on Thursday. The undertone is not expected to deviate much from US Federal Reserve chairman Janet Yellen’s indications last week that a second interest rate hike could happen in this 14th December meeting.

Based on CME Group 30-Day Fed Fund futures prices, the current probability for a rate hike in this meeting stood at 95.4 per cent for it to go up to a range of 0.50 per cent to 0.75 per cent.

Anything higher than the forecast 25 basis points would be detrimental to emerging market currencies as the current price levels have already factored in the minimal increase to a large extent.

That aside, the downside pressure on the FBM KLCI is unlikely to abate any time soon until investors are convinced that the Organisation of the Petroleum Exporting Countries (Opec) will do something concrete in its November 30 meeting to rein in on supply to boost crude oil price, which is feeling the additional heat from a stronger US dollar.

Even if Opec agrees and Russia goes along with the decision, price appreciation could be capped at US$55 a barrel, if the US shale producers restart production on a bigger scale, especially with the presidentelect encouraging new energy industry development to boost production and to make the US energy independent.

Thus, investors are advised to trade cautiously and to remain defensive in their investment strategy.

Technical Outlook

The benchmark slumped to the lowest in more than four months on Monday, depressed by sustained foreign fund sales on key blue chips and the weak ringgit.

The local index fell 17.55 points, or 1.1 per cent to settle at 1,616.64, off the opening high of 1,629.05 and low of 1,614.11, as losers swarmed gainers 586 to 210 on slow turnover of 1.38 billion shares worth RM1.8 billion.

The index bounced back strongly the next day, helped by local fund buying support in key plantation heavyweights after crude palm oil prices firmed due to the weak ringgit outlook.

The Bursa recouped 13.92 points to end at 1,630.56, off an opening low of 1,617.33 and high of 1,635.04, as gainers led losers 531 to 258 on cautious trade totaling 1.34 billion shares worth RM1.9 billion.

Blue chips ended off early highs on profit-taking Wednesday, as foreign selling dampened prices amid the weaker ringgit as fears resurfaced over more aggressive hikes in US interest rates.

The FBM KLCI slipped 2.93 points to close at 1,627.63, off an early high of 1,637.4 and low of 1,624.31, as losers beat gainers 449 to 349 on higher turnover of 1.83 billion shares worth RM2.07 billion.

Shares fell further the following day, weighed down by selected blue chips, as key regional markets fluctuated ahead of US inflation data and testimony from Yellen that will help shape interest-rate expectations.

The benchmark index eased 0.86 points to close at 1,626.77, off an early high of 1,629.81 and low of 1,620.94, as losers edged gainers 397 to 332 on reduced turnover of 1.38 billion shares worth RM1.46 billion.

Stocks remained under pressure Friday, as cautious sentiment prevailed ahead of the weekend amid uncertainty over changes in trade and economic policies by the new US administration and volatile oil prices.

The index slid another 2.97 points to settle at 1,623.8, off an early high of 1,626.52 and low of 1,617.7, as losers edged gainers 402 to 356 on tepid volume totalling 1.39 billion shares worth RM1.51 billion.

Trading range for the blue-chip benchmark index last week nearly halved to 23.29 points, compared with the previous week’s 40.26 points range, as blue chips slipped into profit-taking consolidation ranges.

Last week, the FBM-EMAS Index fell 45.04 points, or 0.39 per cent, to 11,459.21, while the FBM-Small Cap Index eased 44.56 points, or 0.3 per cent to 14,963.8.

The daily slow stochastic momentum indicator for the FBM KLCI is mildly oversold after last week’s failed recovery attempt, which was mirrored by the weekly indicator’s signal line that inched lower into the oversold zone.

The 14-day Relative Strength Index (RSI) indicator hooked down again due to the weak closing last Friday with a reading of 35.37, while the 14-week RSI declined to a reading of 39.64 to confirm the daily indicator’s bearish momentum.

The daily Moving Average Convergence Divergence (MACD) trend indicator continues to expand negatively, while the weekly MACD indicator’s weak position reinforced the bearish daily signal following the sell signal triggered two weeks ago.

The -DI and +DI lines on the 14day Directional Movement Index (DMI) trend indicator registered further bearish expansion, with the ADX line rising above 25 to confirm a bearish trend ahead.

Conclusion

While mildly oversold momentum on the FBM KLCI following last week’s correction point to possibility for rebound gains this week, more bearish trend indicators and weak buying momentum implied that any technical rebound attempts should be fleeting.

In the meantime, the uncertain near-term trend in oil price and ringgit should also discourage investors from establishing firmer commitments. Hence, trading volumes are likely to stay low.

On the index, key retracement support remains at 1,616, the 50 per cent Fibonacci Retracement (FR) of the 1,503 low of August last year to the 1,729 high of April, which must hold to prevent a re-test of the January low of 1,600.

Next key retracement support upon a breakdown will be the 61.8 per cent FR at 1,589, and subsequently 76.4 per cent FR at 1,556.

On the upside, immediate resistance will come from the 38.2 per cent FR at 1,643, with the 50, 100 and 200-day moving average levels of 1,660, 1,663 and 1,667 acting as formidable overhead hurdles.