US rate cut fails to boost FBM KLCI, ringgit

This article first appeared in The Edge Financial Daily, on August 2, 2019.
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KUALA LUMPUR: The US Federal Reserve’s (Fed) first interest rate cut in over a decade failed to lift sentiment in the local stock market yesterday while the ringgit weakened against the greenback, after the Fed chairman dented hopes for multiple rate cuts.

The FBM KLCI opened lower with gains thereafter limited despite the gradual uptrend throughout the day. While the benchmark index finished a marginal 0.26% up at 1,639.07 points — near its intraday high of 1,639.13 — overall market breadth was negative with decliners outstripping gainers by nearly 1.5 times.

“There is nothing for the market to celebrate about. Nothing of this sort — a 25 basis points (bps) rate cut of three times — has been promised so the market’s turned out to be kind of disappointed,” Inter Pacific Securities research head Pong Teng Siew told The Edge Financial Daily when contacted.

The Fed, as largely expected, reduced its fund target range by 0.25% to a range of 2% to 2.25%, but celebrations were cut short in emerging markets after Fed chairman Jerome Powell poured cold water on market hopes of a long rate-cutting campaign. Powell instead signalled that the 0.25% cut was not the beginning of a long series of cuts.

At yesterday’s close, the MSCI’s emerging market stock index, which captures large- and mid-cap representation across 26 emerging markets including that of Malaysia, fell 0.6% to its one-month low, tracking the Dow Jones Industrial Average’s 1.23% losses overnight.

Asian emerging stocks mostly slipped with the Shanghai Stock Exchange Composite Index down 0.81%, South Korea Stock Exchange Kospi Index finishing 0.36% lower, while the Jakarta Stock Exchange Composite Index fell 0.14%.

Pong said the disappointment was also reflected in the ringgit, which opened lower against the US dollar in early session yesterday as the greenback soared after the interest rate reduction.

At the time of writing, the ringgit weakened to 4.1458 against the greenback from its Wednesday close of 4.1265.

“At 4.145, the US dollar is at about fair value to the ringgit right now. That basically means that it has taken the Fed’s promise of a rate cut kind of sizzling out at one to two cuts,” said Pong.

MIDF head of research Mohd Redza Abdul Rahman concurred, saying investors had been expecting at least a 50bps cut this year. “This has resulted in the weakening of the ringgit and other major currencies against the greenback as well as weakening stock market performance.”

Powell had cited signs of a global slowdown, simmering US trade tensions and a desire to boost too-low inflation in explaining the central bank’s decision to lower borrowing costs for the first time since 2008 and move up plans to stop winnowing its massive bond holdings.

Experts believed that an interest rate cut in the US would make emerging market currencies relatively attractive, which in turn could see more funds flowing into the emerging markets. Meanwhile, any strengthening of the emerging market currencies would enhance the returns on their investments in these markets.

But Powell’s news conference commentary had sent markets reeling as he appeared more hawkish than expected when he said the mid-cycle adjustment to policy should not be viewed as the beginning of a long series of rate cuts, while indicating that the July Fed decision may not be a one-and-done cut.

The US Dollar Index rushed to its strongest closing since May 2017, while the US Treasury yields whiplashed and the two- to 10-year yield spread flattened to its narrowest since March, which according to UOB senior economist Alvin Liew, reflects the low market confidence that the latest Fed action will be enough to keep the US economy expanding.

Kenanga Research said the market is looking at US lowering its rate by another possible 25bps before year-end, and Bank Negara Malaysia (BNM) “has the scope and room to cut interest rates if it requires to do so” given Malaysia’s controlled inflation and widening output gap.

This may not take place in 2019 as BNM in May made a 25bps cut, and as domestic growth trajectory remains only slightly below growth potential and inflationary trend is expected to gradually pick up in the second half of 2019, it added.

Sharing similar sentiment, Hong Leong Investment Bank Research said while it maintains its expectation for BNM to keep the overnight policy rate at 3%, a worsening global environment may tip the central bank to take a 25bps cut.