Weekly Market Expectation

Bursa Malaysia shares rose last week as investors returned to nibble after the long CNY festival holiday break, but lack of buying momentum and profit-taking amid weakness in Asian markets checked gains.

The US markets displayed more signs of confidence as the week draws to a close last Friday than Malaysian or Asian markets. Lower than expected January inflation rate, positive earnings data with more three quarter of companies that reported results beating street estimates, sustainable expansion in manufacturing activities and leading indicators caused the US markets to brush aside the unexpected 25 basis points increase in Fed’s discount rate.

It is important to acknowledge the difference between discount rate and federal funds rate. The former is the established rate for banks to borrow from the fed while the latter is the overnight lending rate between banks. Optimist would view the increase in discount rate from a positive perspective as that is a clear indication of banks’ liquidity returning to normalcy and improved confidence among banks to lend each other. This increase will in no way lead to an increase in funds rate that corresponds directly to banks’ lending rate to consumers in the near-term. With the increase, the current spread between the discount and fund rates is at 50 basis points. It is still possible for the spread to rise above 100 basis points before anything is done to the latter.

It appears that the current tame inflation, high unemployment and tepid economic growth outlook for 2010 will keep the target rate well into second half of this year. Ben Bernanke, the Federal Reserve chairman, is likely to echo the same view when he delivers his semi-annual report on the US economy and interest rates to House and Senate panels this Wednesday and Thursday. As such, negative perceptions related to the increase in discount rate will be short-lived and the US markets are expected to remain buoyant in the near term.

Any positive spill over effect from abroad is good for the local market, which is likely to see an improved trading volume when investors return from their long Chinese New Year holidays. Nonetheless, a change in policy direction could act a short-term dampener if BNM opts to increase its OPR next Thursday (March 4th) after indicating recently that the rate is hovering at low levels for too long and it prefers to normalize it than tightening it. Thus, the outcome of January CPI that will be released this Wednesday is immaterial although consensus expectations are for it to remain tame at 1.5%.

A lower numbers could excite the market for a brief moment but worries of a rate hike should return, more so if the 4Q GDP numbers for Malaysia that will be released on the same day came better than expected 2.9% yoy.

Attraction in Glove stocks may return this week after Supermax reported a strong FY09 net profit which almost tripled to RM129.8mn compared to the previous year on the back of strong global demand, higher output and better pricing power. Its 24% increase to 62 sen per share in its earnings guidance for this financial year and the announcement of a special and final tax exempt dividend of 9% and 8% are added attractions in the stock apart from its huge 20% discount in valuation compared to its nearest competitor Top Glove.

Proton may attract some interest as well as its nine-month FY10 net profit already made up 94% of consensus net profit forecast for full year. A speculated tie-up with a European player real soon is likely to be an added attraction.

The outcome of EON Capital’s EGM this week will be closely watched. It appears that some of the major shareholders are confident that they will get shareholder approval to appoint eight new directors. News in the grapevine indicates that Hong Leong Bank’s strategic planning for the new financial year assumes the inclusion of EON Capital. If true that surely speaks volume about a hidden agenda.

On technical side, conflicting signals from trend and momentum indicators for the KLCI suggest that the index may pause for further consolidation, but the impending daily MACD buy signal offers hope for the bulls this week. Further strength in buying momentum, with more investors returning to the local stock market after the Chinese New Year holidays, is crucial for a more sustained recovery from the present consolidative phase. The resilient US stock market last Friday, encouraged by lower-than-expected inflation data which reduced concern the Federal Reserve will increase interest rates, should provide a boost to sentiment this week.

In any case, watch for resistance for the index at 1,266 and 1,276, the respective 50% and 61.8% Fibonacci Retracement (FR) of the sell-down from the 21 January high of 1,308 to the recent pivot low of 1,224, where profit-taking and selling could check gains. A decisive breakout backed by robust buying momentum in excess of one billion shares daily above the 100-day and 50-day moving averages, currently at 1,261 and 1,272, will be ideal to support further recovery going forward. Immediate support to cushion downside remains at 1,256, the 38.2%FR, with 1,249 and 1,240 acting as stronger downside buffers.