KUALA LUMPUR (Sept 5): The FBMKLCI is expected to range sideways between 1,860-1,880 points next week, driven by lack of local leads, continuing Ukraine tension, and interest rate uncertainties in Europe and USA.

Affin IB Head of Retail Researh and Chief Chartist Dr Nazri Khan said, pullback from the highs(including S&P 500 /Dow Jones failure technical test) would suggest that positive action from the ECB had already been built into the market and not a strong upside catalyst.

He said most of the risk-aggressive currencies such as the euro, British pound and Aussie dollar also sank (ringgit/USD depreciate 1.5% week-on-week) after the ECB trimmed 10 basis points its refinancing, deposit and marginal lending rates.

“Given that ringgit has a positive intermarket correlation with the Commodity Index and euro, these trend may be not positive for the broad local commodities and local market,” he said.

Nazri, who is also president of the Malaysia Association of Technical Analysts, said the best evidence of rising aversion was that the dollar had surged against most Asian currencies including ringgit (USA dollar was up 4.8% while ringgit was down 2.2% since August 2014).

He said the big question for the markets remained whether the ECB would ultimately undertake a full-scale QE programme as there is no consensus within ECB on outright QE in the Eurozone.

“We believe ECB soft rate cuts and continued upward US surprises suggest global equities are vulnerable to more consolidation as the Fed shifts towards normalising monetary policy.

“From geopolitical angles, although there was a short term sense of relief in Russian markets too, with the MICEX equity index rising 3.5% week-on-week (w-o-w) and the rouble rallying 1.6 per cent w-o-w against the dollar, hopes for a cooldown in Ukraine so far failed to provide any positive backdrop for global equities as Russia could not agree to a complete ceasefire in Ukraine suggesting more uncertainties surrounding the situation,” he said.

Nazri said that on the technical front, the FBM KLCI had carved out a rather tight 20-point trading range (1,860-1,880) over the last three weeks, with some marked reduction in volume momentum.

He said it was also worth noting that the last three daily closings of the FBM KLCI had fallen within a narrower 10-point range (1,860-1,870).

Nazri said this coiling action highlighted downside volatility in the market, as well as indecision around the 1860 support level.

He said although the bull camp maintained the advantage (uptrend going back to August 2013), there were signs of Bursa fatigue setting in as momentum decreases on lighter volumes.

He added that an active global economic calendar in the coming weekly session, as well as ECB policy hint on the scale of QE has the potential to drive global equities prices either way of their respective ranges.

“For now, the short term trend is going into the sideways range, which puts the bulls and bears in equal position.

“Swing low support for the FBM KLCI comes in at 1860 and 1840 while swing high resistance now rest at 1880 and ultimately the 1900 psychological level.

“A crossover down in the daily stochastics is a bearish signal. Stochastics turning bearish at overbought levels will tend to support lower prices if support levels are broken,” he said.

Nazri said the FBM KLCI close of below 50-day moving average was a mildly negative setup.

He expects short term excitement in the local market supported by year-end-institutional-accumulation following the launch of various large scale Bursa IPOs including 1MDB, Weststar, Carimin and Iskandar Waterfront.

He said based on historical precedent, Malaysian equities were expected to outperform the strongest markets in the last quarter of the year, especially on a relative basis during a volatile time (eg in Sep-Dec 2011 KLCI up +0.8% when MSCI Asia ex-Japan down by -19.2%).

He explained that fundamentally, the FBMKLCI was now priced at 16.7 times forward earnings with a dividend yield of 3.14 per cent, well below the MGS 10-year yield of 4.1%.

“If we stacked the various local themes, resilient Q3 corporate earnings against ample local liquidity, high dividend yields, low interest rates and defensive stock market, the local stocks should be attractive on temporary weakness during sideways consolidation.

“Given the soft fundamentals and technicals, we advise traders to trade cautiously, while the longer term conservative investors might want to raise some cash by selling on strength as opportunity to accumulate at lower levels might prevail in the last three months of the year.

“As for trading strategy, we are recommending aggressive traders to accumulate high-momentum-stocks which should continue to rebound despite broad market doldrums,” he said.

Nazri said these included the likes of Bursa, Mahsing, HLIndustry, PMetal, Timecom, Boilerm, Amprop, Pintaras, Tongher, IWCity, Pasukhas, Teoseng, DNEX, LTKM and Zecon.