FBM KLCI rises as markets await BNM meeting

The overnight rally in banking stocks and equities was likely fuelled by expectations that BNM will hold interest rates steady when MPC meets next week


MALAYSIA’S equity market rose yesterday after the US Federal Reserve (Fed) cut interest rates, but the jury is still out if Malaysia’s central bank will follow suit.

The Fed delivered on market expectations when it lowered the Federal Funds Rate for the third time this year, while signalling a pause on further rate cuts, unless the economic outlook materially changes.

This sent the FTSE Bursa Malaysia KLCI (FBM KLCI) 1.14% or 17.98 points higher yesterday to close at 1,597.98, the biggest move since Feb 20 this year, with financial and plantations stocks leading the gains.

Public Bank Bhd, Malaysia’s largest banking group by market capitalisation, was the top gainer for the day, rising 90 sen or 4.64% to close at RM20.30.

Malayan Banking Bhd, CIMB Group Holdings Bhd, RHB Bank Bhd, Hong Leong Bank Bhd and AMMB Holdings Bhd were the other banking heavyweights in the green yesterday.

The overnight rally in banking stocks, as well as Malaysian equities in general, was likely fuelled by expectations that Bank Negara Malaysia (BNM) will hold interest rates steady when its Monetary Policy Committee (MPC) meets next Tuesday.

BNM opting to maintain the benchmark Overnight Policy Rate (OPR) shortly after the Fed cut lending rates could position Malaysian assets for further gains as traders chase higher yields. BNM last lowered the OPR in May this year.

The ringgit also made up ground against the US dollar yesterday, strengthening as much as 0.2% to 4.1733 from its last closing price.

The local note settled higher at 4.1782 against the greenback, shortly after China cast doubt over a long-term trade deal with the US.

Analysts are divided over whether BNM will keep the OPR steady when the MPC meets for the last time this year on Nov 5 or opt to lower the interest rate to spur on the domestic economy.

“A Fed rate cut allows more policy wiggle room for BNM, but I agree they will likely hold back until 2020 and allow the stimulatory effects of (Budget 2020) to take hold,” AxiTrader Asia-Pacific market strategist Stephen Innes told The Malaysian Reserve (TMR).

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said BNM is forecast to reduce the OPR by 25 basis points (bps) next week due to the favourable interest-rate differential and the need to stimulate the domestic economy.

“The options for BNM to reduce the OPR is widely open as the interest-rate differential with the US is in favour of Malaysia, at about 150bps,” he told TMR.

He said the business case for lowering the OPR is also building up as the Malaysian economy, especially the construction and export-oriented sectors, needs some form of government intervention.

In response to whether Malaysia’s mildly expansionary budget would be sufficient to bolster the domestic economy, Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said fiscal and monetary stimulus are at their most effective when used in tandem.

“It makes complete sense for BNM to take advantage of the window provided by the Fed,” he told TMR.

“The other side of the coin is that BNM may wish to keep its powder dry and wait for the US-China interim trade deal to pass.”

He said this would be erroneous as the economy was already slowing down even before the US-China trade war turned serious.