NO RELIEF: Development in US, uncertainty ahead of 2014 Budget may extend sideways trend
The relief rally on the United States stocks triggered by a possible six-week deadline extension of the US debt ceiling from mid-October filtered through to boost the local market late last week, after consolidating for the most part of the week. On the broader market, rotational buying interest picked up momentum, especially on oil and gas-related stocks which attracted more retail participation.
For the week, the blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) rose 9.19 points, or 0.5 per cent, to settle at 1,785.75, with Public Bank (+30 sen), Petronas Chemicals (+23 sen) and Maybank (+13 sen) accounting for 80 per cent of the index's gains. Average daily traded volume and value dwindled to 1.67 billion shares and RM1.45 billion, compared to 1.79 billion shares and RM1.66 billion respectively the previous week, caused by investors staying sidelined pending a resolution to the ongoing US government shutdown and extended debt ceiling impasse.
It is unlikely for the relief rally seen in most global equity markets last Friday to sustain this week with the US Congress remaining divided over policy measures despite the looming US debt ceiling deadline this Thursday. The Congressional Budget Office has warned that the US will start missing payments sometime between October 22 and October 31, if the limit is not raised.
A default will be catastrophic not only for the US but also for the rest of the world, mainly economic superpowers like China and Japan that have amassed US$1.28 trillion (RM4.07 trillion) and US$1.14 trillion in US Treasuries, respectively. This is about 43 per cent of foreign-held US debts that amounted to about US$5.6 trillion and about 20 per cent of US$12 trillion outstanding US government debts. Malaysia holds about US$29.2 billion in US Treasuries.
A loss of confidence in the US dollar and a shift in asset allocations will cause a spike in US interest rates and damage its economic recovery. This will have far-reaching implications on the rest of the world. Any appreciation in the Japanese yen or euro will dampen economic growth prospects in Japan, Asia and the European regions as well.
In fact, the progress so far on rela-ted meetings is not satisfactory with House Speaker John Boehner, who offered the temporary debt-limit increase until November 22 without policy conditions, saying President Barack Obama rejected his latest fiscal offer and the Senate Republicans blocking Democrats' plan to suspend the debt ceiling through next year. Obama is playing tough and refused any conditions attached to a debt-limit in-crease or a spending cut.
Considering that the House of Representati-ves is not scheduled to vote on the issue again until this evening and Tuesday is a public holiday in Malaysia, one can anticipate some correction in the FBM KLCI today despite the Wall Street's upbeat performance last Friday. Any sharp pullbacks should be a buying opportunity as the US is not expected to default on its debt obligations.
A prolonged weakness in the US dollar should augur well for commo-dities, which typically have an inverse relationship with the currency. Crude palm oil prices, especially, should see additional catalyst emerging from manageable level of stocks of about 2.1 million tonnes by year-end versus 2.6 million tonnes in December last year. Maintain overweight on commodity-related sectors such as plantation and O&G.Technical Outlook
Spot month October KLCI futures contract traded on the Bursa Malaysia Derivatives Bhd added 6.5 points, or 0.36 per cent, last week to 1,789.5, reducing its premium to cash to 3.74 points, from 6.4 points premium the previous Friday, as traders stayed cautious given the still unresolved US government shutdown and debt limit talks.
Key index heavyweights extended consolidation with downward bias last Monday, dampened by weaker regional markets as investors fret over the political deadlock from the prolonged US government shutdown and looming debt ceiling. The FBM KLCI ended flat at 1,776.82, off an early high of 1,780.27 and low of 1,773.56, as losers beat gainers 428 to 296 on lacklustre trade totalling 1.62 billion shares worth RM1.23 billion.
Blue chips ended flat the next day after erasing earlier losses following overnight Wall Street falls caused by concern over the extended US government shutdown and debt ceiling deadlock, as investors cautiously nibbled on weakness. The FBM KLCI closed 0.68 point up at 1,777.5, off an early low of 1,771.32 and high of 1,778.13, as gainers edged losers 365 to 332 on slower trade totalling 1.51 billion shares worth RM1.48 billion.
The local stock market fell on Wednesday with blue chips suffering losses which forced the benchmark index to close at the day's low, as investors continued to worry over the protracted US government shutdown and debt ceiling deadline crisis.
The FBM KLCI lost 8.38 points to end at 1,769.12, off an early high of 1,775.04, as losers edged gainers 381 to 321 on flat total volume of 1.51 billion shares valued lower at RM1.35 billion. Blue chips rebounded the following day, led by banking stocks, as investors returned to nibble on speculation the US government shutdown is near an end, and agreement to raise the debt ceiling to prevent a default is close at hand. The FBM KLCI recouped 6.8 points to 1,775.92, off an early low of 1,768.64 and high of 1,777.45, as gainers led losers 501 to 264 on higher trade totalling 1.86 billion shares worth RM1.56 billion.
The overnight relief rally on Wall Street spilled over to boost local stocks ahead of the weekend, with rotational buying interest in O&G stocks attracting more retail participation. The index extended gains by 9.83 points to end Friday at 1,785.75, off an early low of 1,783.53 and high of 1,788.99, as gainers beat losers 480 to 282 on total trading volume of 1.82 billion shares worth RM1.61 billion.
Trading range for the local blue-chip benchmark index shrank to 20.35 points last week, compared with the 22.18 points range the previous week, as blue chips sustained the consolidation mode. The FBM-Emas Index gained 79.98 points, or 0.65 per cent, to 12,431.66 for the week, while the FBM-Small Cap Index bounced back by 202.02 points, or 1.32 per cent, to 15,502.3, as small cap stocks rebounded on renewed buying interest from retailers.
The daily slow stochastic indicator for the FBM KLCI has hooked up again at the lower neutral zone, reinforcing the bullish position on the weekly indicator. The 14-day Relative Strength Index (RSI) indicator recovered further to a more bullish reading at 59.02 as of last Friday, while the 14-week RSI improved to a reading of 57.86.
On trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line is hooking up again after triggering a sell signal the previous week, but the weekly MACD signal line continued to level off, suggesting consolidation ahead. Meanwhile, the 14-day Directional Movement Index (DMI) trend indicator's +DI and -DI expanded away from each other on a rising ADX line, suggesting a return to uptrend mode.Conclusion
The profit-taking correction for the past two weeks has fully neutralised technically overbought momentum and paved way for support building to anchor the next recovery leg. Nevertheless, stronger buying momentum from the current pace, specifically towards the two billion shares daily mark, will be essential to promote a more sustainable uptrend ahead.
Meantime, lingering caution over the US government shutdown and debt ceiling extension on the external front, and uncertainty ahead of the 2014 Budget next week on the domestic front, should act to extend the present sideways trend.
Immediate support for the index remains at the 50-day moving average currently at 1,762, with next chart support from the 1,747 to 1,753 gap-up of September 10, and retracement support at 1,738, the 38.2 per cent Fibonacci Retracement (FR) level of the February 7 low of 1,597 to the all-time high of 1,826. Immediate resistance is revised higher to 1,805, the September 20 peak, followed next by the July pivot high of 1,811 and all-time high of 1,826.The subject
expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.