Divisive Fed sends mixed signals to Malaysian markets

by MARK RAO / pic by TMR FILE

MALAYSIA’S equity and bond markets are set to benefit from further US monetary easing and persistent trade risks as investors look for higher yielding assets, yet the ringgit weakened on mixed signals from the US Federal Reserve (Fed).

After opening 6.07 points lower at 1,628.80, Malaysia’s benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) ended four points higher at 1,639.

This comes after the Fed delivered on market expectations by lowering its key interest rate for the first time since the 2008 global financial crisis, citing fears over global growth and muted US inflation.

Manulife Investment Management chief economist and head of macroeconomic strategy Frances Donald said the Fed is expected to cut rates at least twice this year, as an insurance against deteriorating growth and to stoke inflationary pressure in the US.

“Should trade tensions re-escalate in the second half of the year (2H19), we would expect the Fed to respond with more than two rate cuts,” he said in a report published yesterday.

Asian equity markets — including Malaysia — are attractively placed in this scenario as they demonstrated resilience despite protracted US-China trade tensions, while Fed dovishness bodes well for Asian bonds.

Manulife Asset Management Services Bhd (MAMSB) head of total solutions and equities investments Tock Chin Hui said Malaysian equities offer attractive dividend yields and significant defensiveness amid trade uncertainties.

“The Malaysian market is expected to show resilience and could outperform regional peers, given its defensive trait and year-to-date laggard performance,” she said in the same report.

She added that Malaysian corporations and consumers are expected to spend more due to progressive tax refund disbursements and the revival of mega infrastructure projects which are driving domestic consumption.

Investor sentiment should also improve as the government embarks on structural changes to overhaul the domestic economy and future-proof it against shocks, she said.

The FBM KLCI continues to trade in negative territory this year as lacklustre corporate earnings, tepid market sentiment and domestic uncertainties weighed on the performance of the composite index.

It extended the losses noted in 2018, where the market declined 5.9% after registering a total net outflow of RM11.7 billion last year.

Malaysia’s bond market was also in the red in 2018, registering RM21.1 billion in total net outflows.

In the fixed-income space, MAMSB head of fixed income Andy Luk said the widened interest-rate differential between Asian and developed bond markets raises the appeal of Asian bonds, especially high-yielding bonds.

“With Bank Negara Malaysia cutting (its) Overnight Policy Rate by 25 basis points in May 2019, Malaysia joined other central banks globally on their dovish stance,” he said, adding that this positions a bullish outlook for global and local bond markets.

“With strong domestic liquidity and lower net supply in 2H19, we see signs of healthy demand-supply dynamics in the Malaysian market.”

He said credits were well supported in 1H19 and are expected to continue delivering strong performances in the coming months.

The ringgit reversed its July gains as markets were fearful that a divisive Fed could bring a halt to further rate cuts this year, lending support to a stronger US dollar direction.

After appreciating 0.2% against the greenback last month, the local note breached the RM4.14 mark yesterday.

Fed chair Jerome Powell said the US rate cut is to “insure against downside risks” and is not a signal for further monetary easing, while dissenting votes from two Federal Open Market Committee members indicate that additional cuts this year might be problematic.

“As markets continue to digest the Fed’s latest signals, as confusing as they were, a less-dovish Fed moving forward suggests a stronger dollar is set to stick around for a while,” FXTM market analyst Han Tan said in a research note yesterday.

The greenback’s resilience, in turn, should continue exerting downward pressure on most Asian currencies.

He said the US Dollar Index climbed 0.8% to breach the 98.8 level, its highest level since May 2017, as investors moved to safety amid mixed signals from the US central bank.

The ringgit had a volatile year thus far due to contrasting cues in the market, appreciating 1.7% against the dollar from the start of the year to RM4.06 on March 21, before depreciating 3.3% to close at a year-high of RM4.19 on May 29.

The ringgit, as well as other emerging and risk-based currencies, had been a victim to an aggressive Fed rate cycle in the past, depreciating 2.7% against the US dollar in 2018 as the Fed raised lending rates four times that year.