US BUDGET IMPASSE: Investors expected to remain on sidelines amid adverse impact concerns
STOCKS stayed in narrow rangebound trade last week, as the first partial United States government shutdown in 17 years increased market uncertainties and forced investors to the sidelines.
Most investors also stayed away amid worries the protracted US government shutdown will complicate the political deadlock over increasing the debt ceiling, which is looming with a mid-October deadline.
Week-on-week, the blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) ended flat at 1,776.56 (+0.4 of a point), as gains in Public Bank (+14 sen), Sapura Kencana Petroleum (+8 sen) and Genting Malaysia (+7 sen) offset losses on CIMB (-33 sen), UMW Holdings (-38 sen) and AMMB Holdings (-9 sen).
Average daily traded volume and value decreased to 1.79 billion shares and RM1.66 billion, compared with the 2.13 billion shares and RM1.84 billion the previous week, as investors became increasingly cautious given the uncertainty over the adverse impact from the US government shutdown.
There is no doubt that current uncertainties over the US budget brinkmanship and debt ceiling impasse had kept investors on the sidelines. Nonetheless, any dips in the FBM KLCI should be regarded as a buying opportunity to ride on the year-end 2013 or new year rally as the US Democrats and Republicans are expected to come to an amicable solution to resolve the budget standoff before the debt ceiling is reached on October 17.
Budget standoff is not something new for the US as the democracy has witnessed similar deadlocks on numerous occasions in the past that led to government shutdowns.
For instance, in the last 15 similar occurrences since 1977, the average shutdown lasted about six-and-a-half days and the shutdowns ranged between two and 21 days, with the longest recorded between December 16 1995 to January 6 1996, also being the last shutdown before this year's deadlock.
Nonetheless, the US Congress' failure to lift the US$16.7 trillion (RM53.4 trillion) debt ceiling would be the biggest challenge and threat, not only to the US economy, but also to the rest of the world.
A failure would be tantamount to default as inability to borrow will limit the US government's ability to pay its bills by the end of this month. A US default is unprecedented and will be catastrophic, given the US dollar's prominence in world trade and US Treasuries' safe-haven status. Thus, the Congress is very unlikely to take this self-destructive path that will undo all positive measures taken so far to revive the US economy since the 2008 crisis.
The FBM KLCI emerged unscathed during the last shutdown on December 16 1995 and it rose by 13.1 per cent in the following three months. Nonetheless, our benchmark index is not expected to repeat a similar feat due to potential backlash on corporate earnings, if stringent subsidy cuts are introduced in the 2014 Budget to reduce fiscal deficit, which are highly probable to escape a downgrade of our sovereign credit rating.
While the benchmark index is expected to remain in a consolidation mode this week, a positive resolution to US budget brinkmanship this week has the potential to contribute to a relief rally that would run out of steam very soon as we approach October 17.
A positive outcome of the debt impasse will extend the rally. A possible delay in the Federal Reserve's tapering measures in its October 30 meeting, considering the budget standoff's marginal impact on economic growth, would be another catalyst before it makes a pause ahead of the Fed's December 18 meeting. The minutes of the Fed's last meeting to be released onWednesday could shed some light on the above timing as well. Technical Outlook
New spot month October KLCI futures contract traded on the Bursa Malaysia Derivatives Bhd rose eight points, or 0.45 per cent, last week to 1,783, reversing to 6.4 points premium to cash compared with 1.2 points discount the previous Friday.
Bursa Malaysia shares fell on Monday, matching regional weakness following a lower-than-estimated Chinese manufacturing PMI and on concern the US government is headed for a partial shutdown amid political deadlock over budget expansion.
The FBM KLCI slid 7.54 points to settle at 1,768.62, off a low of 1,762.3 and high of 1,781.84, as losers swarmed gainers 558 to 227 on moderate trade totalling 1.85 billion shares worth RM2.38 billion.
Blue chips ended flat on the next day, after recovering from early weakness due to concerns over the first partial US government shutdown in 17 years. The FBM KLCI closed up 0.41 points at 1,769.03, off an early low of 1,759.66 and high of 1,770.34, as gainers edged losers 372 to 361 on cautious trade totalling 1.77 billion shares worth RM1.62 billion.
The local stock market extended its sideways trend on Wednesday, as prevailing worries over the US government shutdown and looming debt ceiling with a mid-October deadline discouraged investors from committing to fresh positions.
The FBM KLCI was trapped within a narrow five-point range bordering 1,774.68 and 1,769.45 before ending the day up 1.32 points at 1,770.35.
Stocks extended rangebound trade the following day, while regional markets were firmer after an index of China's services industries surged to a six-month high. Cautious range trading persisted ahead of the weekend. Nonetheless, the index closed up 5.19 points at 1,776.56, off an early low of 1,769.77 and high of 1,779.02, as gainers edged losers 345 to 344 on slower trade totalling 1.58 billion shares worth RM1.44 billion.
Trading range for the local blue-chip benchmark index dwindled to 22.18 points last week, compared with the 26.14 points range the previous week, as heavyweights extended their consolidation mode. The FBM-EMAS Index ended flat at 12,351.68, which is up 2.38 points, or 0.02 per cent, for the week, but the FBM-Small Cap Index eased 83.29 points, or 0.54 per cent, to 15,300.28, as small cap stocks fell to consolidate recent strong gains.
The daily slow stochastic indicator for the FBM KLCI is hooking up from just above the oversold level, suggesting good rebound potential this week, and reinforcing the positive outlook on the weekly indicator. The 14-day Relative Strength Index (RSI) indicator improved marginally to a slight positive reading of 54.88 as of last Friday, similar to the mild improvement on the 14-week RSI at a reading of 56.17.
As for trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line is levelling after flashing a sell signal last week, while the weekly MACD signal line extended its downward path to suggest further consolidation ahead.
Meanwhile, the 14-day Directional Movement Index (DMI) trend indicator's +DI and -DI lines continued their contraction towards each other on a levelling ADX line, also signalling consolidation ahead.Conclusion
With most momentum and trend indicators for the FBM KLCI still showing consolidation patterns, blue chips are likely to extend profit-taking consolidation for another week. Prevailing uncertainties over a protracted US government shutdown and complications from the political gridlock on increasing the debt ceiling should discourage investors from participating in the market and push them to the sidelines.
Immediate support for the index remains at the 50-day moving average at 1,765, with next support available from the 1,747-1,753 gap-up of September 10, while next retracement support will be at 1,738, the 38.2 per cent Fibonacci Retracement (FR) level of the 7/2/13 low of 1,597 to the all-time high of 1,826. Immediate resistance stays at the previous Monday's high of 1,781, followed by 1,805, with stronger hurdles at the July pivot high of 1,811 and all-time high of 1,826.
On blue chips, prefer key banking stocks CIMB and RHB Capital on further dips for improved rebound profits, while lower liners in the construction, property and oil & gas sectors such as AZRB, DRB-HICOM, Hua Yang, Alam Maritim, Dialog Group and Hiap Teck Ventures are attractive to accumulate for medium-term upside potential.The subject
expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.