August Volatility Looms For KLCI
Global trade negotiations and upcoming central bank decisions are taking center stage, influencing market movements across Asia, the US, and Malaysia. Investors are navigating a complex landscape marked by a crucial tariff deadline, significant earnings reports, and ongoing policy reviews.
Asia Markets Dip Amid Caution Ahead of Key Events
Asian markets largely ended lower last week, pulling back from recent rallies driven by optimism over US trade talks and strong second-quarter earnings from Wall Street. Momentum faded as caution set in ahead of several pivotal events: a critical tariff deadline on August 1st, the Federal Open Market Committee (FOMC) policy decision on July 31st, and a slew of major US economic data releases and corporate earnings.
US Markets buoyed by Earnings and Trade Hopes
In contrast, US markets saw a positive finish, with the S&P 500 rising 0.4% to notch another record close and the Dow Jones Industrial Average jumping 208 points. This ascent was primarily lifted by continued optimism surrounding the earnings season. So far, 80% of S&P 500 companies reporting have surpassed forecasts, with earnings growth tracking at a robust 7.7%, significantly higher than the 5.8% expected at the start of July.
Markets also found support from positive trade developments. On July 28th, the US and the European Union reached a hard-fought trade deal, which will see the bloc face 15% tariffs on most of its exports, including automobiles, but crucially staving off a full-blown trade war. This agreement comes less than a week before President Donald Trump's higher tariffs were set to take effect.
The week ahead for US investors will be dominated by the busiest stretch of the earnings season, with key reports from tech giants like Microsoft, Meta, Apple, and Amazon, along with Boeing, Procter & Gamble, and numerous other prominent companies. On the macro front, attention will be on the FOMC's policy decision (expected to hold rates steady between 4.25%-4.50% according to market analysts), the advance estimate for US Q2 GDP (forecast to rebound to 2.5%), ADP employment figures, monthly payrolls, and ISM manufacturing data.
KLCI Pressured by Local and Global Headwinds
The Kuala Lumpur Composite Index (KLCI) mirrored the broader Asian sentiment, falling 6.6 points to close at 1,533.8. The local benchmark was particularly weighed down by a sell-off in Tenaga Nasional Berhad (TNB) shares after the utility giant was slapped with a fresh RM840.13 million tax notice from the Inland Revenue Board (IRB) for the Year of Assessment (YA) 2022. This comes shortly after TNB lost a significant RM1.25 billion tax dispute for YA 2018 in the Federal Court earlier this month.
Sentiment was further dampened by uncertainty surrounding the US-Malaysia trade deal. Malaysia's firm stance on non-tariff barriers reportedly risks excluding it from favorable terms already secured by ASEAN peers such as Vietnam, the Philippines, and Indonesia, adding to concerns about its trade competitiveness.
Foreign investors continued their net selling, marking a third consecutive week of outflows with a net selling of -RM137 million last week. This brings the July month-to-date net outflow to -RM579 million and the year-to-date figure to a substantial -RM12.7 billion. In contrast, local institutions emerged as net buyers, recording +RM93 million for the week (though their weekly net flow was -RM15 million due to the accounting of market transactions, July MTD: +RM506 million; YTD: +RM10.97 billion), and local retailers also showed resilience with +RM18 million (weekly: +RM106 million, July MTD: +RM73 million; YTD: +RM1.72 billion).
Technical Outlook and Market Outlook
HLIB Research indicates that the KLCI appears to have found temporary support after rebounding from the 1,510 level. The index remains on the cusp of a potential bullish triangle breakout, provided it avoids a decisive fall below 1,510 and 1,520. A breakout above the downtrend line near 1,551 could revive bullish momentum, targeting resistances at 1,563 (200D MA) and 1,575 (50W MA). Conversely, a significant drop below 1,510 could trigger a deeper pullback towards 1,500 and 1,488.
For the upcoming week, the KLCI is expected to trade range-bound between 1,518 and 1,551 as investors digest the FOMC outcome and the ongoing US trade negotiations, including those with Malaysia. Caution is likely to prevail amid expectations of a soft August earnings season and the index's historical underperformance in August (with 10-year, 20-year, and 30-year average declines of -0.7%, -1.2%, and -2.2% respectively). Domestic headwinds from subsidy rationalisation and the potential expansion of the Sales and Service Tax (SST) could further dampen consumer sentiment and earnings visibility, adding to the market's cautious outlook. Related
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