When the U.S. sneeze the rest of the world catches the cold.

Our Malaysian bourse could carry on marching to the beat of its overseas peers as volatile external forces continue to dictate investors’ sentiment. Its benchmark FBM KLCI may gyrate with a negative bias, probably falling inside the support zone of 1,465-1,495 ahead.

The key market barometer reached a low of 1,509.37 before settling at 1,524.43 last week, down 24.4- point or 1.6% from where it was two Fridays ago, its fourth consecutive week of declines. Both the FBM 70 Index (-2.8% week-on-week) and the FBM ACE Index (-1.7%) were hit too. Trading activity rose to a daily average of 1.2b shares valued at RM2.0b, compared to the 1.0b units worth RM1.6b traded a fortnight ago. When the U.S. sneeze the rest of the world catches the cold. And this was what happened last week. Although the legislative approval for a raise in federal debt ceiling was granted, worries over the U.S. economy losing steam and sovereign credit rating downgrades spooked investors.

Consequently, Wall Street’s equity indices dived sharply to close with a weekly drop of between 5.8% and 8.1%, thus wiping out their year-to-date gains. The bears also crossed over to the other parts of the world, trampling on Asian equities to leave behind a trail of destructions. For the week just ended, the worst hit stock markets in the region were Taiwan (-9.2%), Korea (-8.9%) and China shares listed in Hong Kong (-7.6%). With the economy being the salient talking point these days, the U.S. Federal Reserve will come under greater scrutiny this week. At the Federal Open Market Committee meeting on Tuesday, there could be added expectations for the policymakers to announce fresh economic stimulus initiatives, or at least prevent
confidence from tanking further by spelling out contingency plans should the world’s largest economy threaten to slip into a double-dip recession, while keeping interest rates low for an extended period. Realistically speaking, it will take time for sentiment to pick up again following last week’s global equities rout. This should apply too to our local bourse as its performance will still be subject to foreign fund flows (and any redemption impact). According to the stock exchange, foreigners were net buyers for the fourth straight month when they posted a surplus sum of RM0.6b in Jul (versus +RM3.2b in Jun). The amount of foreign money in Malaysia equities, therefore, could have increased slightly (from our estimate of RM290b based on a foreign ownership of 22.0% as of end-Jun), notwithstanding last week’s market sell-off.

Meanwhile, in the month of Jul, local institutional funds were equally balanced in terms of buying and selling (versus a net selling figure of RM1.9b the previous month) while retail investors were net sellers to the tune of RM0.2b (-RM0.8b in Jun). For the coming week, our domestic stock market may continue to take the leads from overseas developments, which will make local news less relevant. On tap are: (a) the index of industrial production report for Jun, due for release on Wednesday; (b) plantation statistics for Jul (to be out on Wednesday); and (c) isolated material corporate events such as a possible share swap pact between the substantial shareholders of Malaysian Airline System and AirAsia.

On the chart, the FBM KLCI – after a pullback of 72.7-point or 4.5% from its peak of 1,597.08 – has dropped to where it was three months ago and is now hovering just marginally above last year’s closing level of 1,518.91. The bearish momentum generated from the aggressive selling last week suggests that the benchmark index is expected to remain under pressures going forward. A further sell-down could then send the bellwether to test the first two support lines of 1,495 and 1,465, respectively.

While a sustained market rebound appears less probable in the short run – as a trend reversal may only be in the offing if and when the FBM KLCI crosses above 1,575 – it is still premature to jump to conclusion that the bull run that started in mid-Mar 2009 has already ended as we anticipate probable interventions from policymakers around the world to check the slide. Let’s keep our fingers crossed that this will be done sooner rather than later.

Report From HWangDBS