THE blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) enjoyed a steep rally early last week, sparked by China’s surprise interest rate cut and growth optimism after the United States’ third quarter gross domestic product (GDP) growth was revised upwards to 3.9 per cent.
Unfortunately, profit-taking and selling pressure increased by late week, with oil and gas-related stocks crumbling after West Texas Intermediate crude oil price slumped below US$70 (RM235.9) a barrel, as the Organisation of Petroleum Exporting Countries (Opec) members resisted pressure to cut supply in the face of a global slump in oil price.
Week-on-week, the FBM KLCI rose 11.76 points, or 0.65 per cent, to 1,820.89, with Tenaga Nasional Bhd (+32 sen), DiGi.com (+25 sen), Petronas Gas (+RM1.12) and Public Bank (+28 sen) representing most of the index’s gains.
Average daily traded volume and value were at 1.89 billion shares and RM1.84 billion, compared with 1.73 billion shares and RM1.66 billion, respectively, the previous week.
Anticipate the weak crude oil prices to continue exerting downside pressure on the benchmark index this week apart from potential unfavourable Purchasing Managers’ Index (PMI) numbers from China. Meanwhile, positive economic data from the US could mitigate any steep falls.
The sharp 40 per cent plunge to US$70 in Brent oil prices since its mid-June high of US$115 per barrel has exposed the net oil exporting nations and O&G sector to a crude reality, a potentially prolonged period of low oil prices that would hurt revenues and investment into the sector.
Opec is not to be blamed for not cutting production as it does not want to lose its market share by doing so when the non-Opec producers did nothing about it. More so, when the shale output from the US is gaining traction and undermining prices and Opec’s market share.
This paradigm shift in Opec’s tolerance towards low oil prices speaks volume about the possibility of prices remaining at low levels for an extended period until the US oil shale producers are flushed out.
This structural change in supply dynamics pose a danger for prices to trend even below the widely predicted US$60 per barrel level, if economic conditions in China, Europe and Japan worsen. While it is impossible for prices to plunge below US$50 per barrel (as most Opec nations production breakeven cost is above US$60 per barrel) in the absence of another economic crisis, prices stabilising around current US$70 levels are already damaging for most net oil exporting nations, including us.
Petroliam Nasional Bhd (Petronas) president and chief executive officer Tan Sri Shamsul Azhar Abbas has already cautioned that at US$75 per barrel, Petronas’ contribution to the government’s coffers will plunge by 37 per cent, or RM25 billion to RM43 billion.
He also has indicated that capital expenditure will be cut between 15 per cent and 20 per cent and new marginal field awards will be shelved at anything below US$80. Besides, with breakeven production for marginal fields at US$65, deterioration in Brent oil prices below that risks halting production at existing marginal fields.
The latest revelation from Petronas is a sentiment dampener for the broader market and may push O&G stocks lower. This may make them very attractive for long-term investors as forward price-to-earnings multiple of many O&G stocks have already dwindled to very low teens from high teens and above twenty times.
Long-term investors should consider nibbling into the sector upon another 10 per cent to 15 per cent corrections in prices from current levels as harsh winter, further monetary easing in Europe and possible expansionary fiscal measures in China could come to the aid of oil prices.
Technical Outlook
Bursa Malaysia shares surged last Monday, copying regional strength after China’s surprise interest rate cut and potential for further stimulus boost in the eurozone helped lift sentiment.
The FBM KLCI climbed 24.64 points to end at the day’s high of 1,833.77, off an early low of 1,809.85, as gainers beat losers 510 to 297 on robust turnover of 2.24 billion shares worth RM1.91 billion. Share prices ended higher the next day, with gains from selected heavyweight supporting the FBM KLCI, in tandem with key regional bourses as investors continued to welcome easy money policies.
The FBM KLCI added 4.79 points to close at 1,838.56 off an early high of 1,843.55 and low of 1,830.48 as losers beat gainers 476 to 308 on robust turnover of 2.09 billion shares worth RM2.46 billion.
Blue chips rose a third session on Wednesday on growth optimism.
The FBM KLCI added 3.61 points to settle at 1,842.17, off an early low of 1,836.79 and high of 1,845.08, as losers beat gainers 452 to 321 on slower trade totalling 1.73 billion shares worth RM1.47 billion.
The local stock market drifted lower the subsequent day as combination of profit-taking and lack of fresh catalyst pulled the index down, with key regional markets mixed in lacklustre trade as the drop in oil price continued to weigh on energy stocks ahead of a pivotal Opec meeting.
The FBM KLCI fell 12.26 points to settle at 1,829.91, off a high of 1,845.76 and low of 1,828.04, as losers beat gainers 567 to 252 on trade totalling 1.55 billion shares worth RM1.35 billion.
Stocks extended losses last Friday. The index lost another 9.02 points to end at 1,820.89, off an early low of 1,815.31 and high of 1,827.16, as losers swarmed gainers 609 to 241 on higher trade totalling 1.86 billion shares worth RM1.99 billion.
Trading range for the local blue-chip benchmark index expanded to 36.13 points last week, compared with the 22.05 points range the previous week, after selective blue chips spiked up on local funds bargain hunting support. The FBM-Emas Index increased 61.17 points, or 0.5 per cent last week to 12,539.10, but the FBM-Small Cap Index shed another 153.71 points, or 0.9 per cent to close the week at 16,443.49, as small-cap stocks slipped further amid weak trading momentum and bearish undertone.
Following the late week correction on the FBM KLCI, the daily slow stochastic momentum indicator has hooked down to trigger a fresh sell signal, while the weekly indicator’s signal line continued to flatten out. The 14-day Relative Strength Index (RSI) indicator eased lower for a reading of 47.37, but the 14-week RSI hooked up for an improved reading at 45.27, to reflect the higher weekly closing.
On trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line has hooked down to weaken the early week’s buy signal, while the weekly MACD indicator’s signal line continued its descent to stay bearish. The -DI and +DI lines on the 14-day Directional Movement Index (DMI) trend indicator crossed over for another sell signal following last Friday’s weak session.
Conclusion
The fresh sell signals triggered on the daily slow stochastics and DMI trend indicators for the FBM KLCI following last week’s failed rebound attempt implied further correction potential this week. Point to note of bearish technical significance would be the negative crossover of the 100-day below the 200-day moving average line, presently at 1,848 and 1,851, respectively, which could herald an extended correction phase.
Nonetheless, a prolonged sideways trading can be expected amid weak participation as trading progresses towards year-end.
On the index, immediate chart supports would be the recent lows of 1,809 and 1,805, which is reinforced by the 1,800 psychological level, followed by stronger support at 1,778, the 50 per cent Fibonacci Retracement (FR) of the 1,660 low of August 28 last year to the 1,896 record
high, and crucial support from the October 17 pivot low of 1,766.
Key overhead resistance for the index stays at 1,848 and 1,851, the current 100 and 200-day moving average levels, while stronger resistance would come from the August high of 1,879.