Uneasiness over political developments is one key factor that is affecting the local market apart from worries over the impact of inflationary pressure on consumption, interest rates and corporate earnings growth.
Investors will be keeping their fingers crossed over what transpires in Parliament today. The Sabah Progressive Party (SAPP) cannot table a standalone motion on a no-confidence vote as it has not given sufficient notice. However, there is speculation that the opposition may turn the government's motion on price increases today into a no-confidence vote. It will be tough for the opposition to succeed unless there is a crossover among Barisan MPs. The sooner BN deals with this, the better will it be for the market.
The threat of inflationary pressures will mount in the coming months. The fact that it is cost-push and not demand-pull inflation has given comfort to many nations, allowing them to sit on the fence and watch inflation spiralling upwards to prevent the supply shock from causing a recession. This accommodative approach has come to a tilting point where growth has to be sacrificed to curb inflation by raising interest rates.
In Malaysia, the May 2008 Consumer Price Index (CPI) was already at a 22-month high of 3.8 per cent year-on-year, driven by food & non-alcoholic beverages.
Against the backdrop of rising inflationary pressure, the likelihood of the central bank changing its accommodative monetary stand and increasing the Overnight Policy Rate (OPR) is higher as we move closer to the fourth quarter.
Chances are very high for a negative real interest rate environment with year-to-date CPI of 2.9 per cent inching closer to the current OPR of 3.5 per cent. There is little incentive for depositors to save their money in the banks in a negative real interest rate environment and this may ignite investments into speculative ventures or investments abroad. Disposable income and consumption will take a beating as well. This is not good for domestic-driven economic expansion.
On the global front, the monetary authorities in the US and Europe have indicated inclinations towards raising rates in the near future to combat rising inflationary pressure. The US Federal Reserve is not expected to announce an increase in interest rate come Thursday but market expectations are high for at least a 25-basis point increase to 2.25 per cent in August. If Bank Negara Malaysia maintains its rate and continues to curb any strong appreciation of the ringgit while rest of the world is pursuing a tighter monetary policy and witnessing stronger appreciation in currencies, the outflow of foreign funds into higher yielding assets is inevitable.
We were already witnessing this phenomenon in the last few weeks with heavy bashing of index-linked counters that have high foreign exposure.
Bumiputra-Commerce Holdings Bhd was one of them. On that score, news that it won a bid to acquire a 42.1 per cent interest in the loss making BankThai pcl may have little positive impact on its share price. As for the broader market, the slide is expected to continue this week. Sell call reiterated.
Technical outlook
Stocks staged a technical rebound on Monday, copying strong gains in the region, but buying momentum lacked strength amid negative market breadth. The KLCI rose to a high of 1,241.59 for the week, before falling sharply in the next three days.
The benchmark index dipped to a three-month low of 1,188.5 on Thursday, prior to staging a technical rebound ahead of the weekend. Key index heavyweight utilities, banking and construction stocks led falls, while plantation stocks again cushioned losses.
While the daily slow stochastics indicator for the KLCI flashed a hook-up signal following last Friday's technical rebound, the weekly indicator extended its decline to signal sustained bearish momentum. Similarly, the 14-day Relative Strength Index (RSI) indicator hooked up from the 30-point mark, but the 14-week RSI weakened further to indicate deteriorating momentum.
The daily Moving Average Convergence Divergence (MACD) signal line dug deeper into negative territory, while the weekly MACD trigger line inched lower after hooking downwards from the slower moving average line. The 14-day Directional Movement Index (DMI) trend indicator strengthened its bearish trend signal, with the ADX line rising above the 25-point level to confirm a developing downtrend.
Conclusion
With all momentum and trend indicators for the KLCI still southward bound, save for the daily slow stochastics and 14-day RSI which hooked up following last Friday's technical rebound, investors can expect further downside risk to re-visit major historical lows. The sharp correction in US stocks last Friday, fuelled by a rally in crude oil prices, will aid a slide below the 1,200 level today. Sector-wise, banks, construction and property will continue to suffer from selling pressure given concerns over rising inflation, slowing economy and surging building materials prices.
The decisive breakdown below 1,214, the 61.8 per cent Fibonacci Retracement (FR) of the upswing from the 1,157 low of March 10 to the 1,305 high of April 29 last week, which mirror the pivot low point of June 5, has further negative implications for the KLCI in the short -term. The index is very likely to fall below 1,192, the last significant retracement support of 76.4 per cent FR, which will grease downside to rechallenge the March 10 low of 1,157 this week. A breach below this level will bring down the index to the next significant historical low point of 1,141 seen on August 17 last year. On the flipside, expect immediate resistance to come from 1,214, the previous 61.8 per cent FR support level.
The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.
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