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V-shaped recovery under threat
Written by Nadia S Hassan
Thursday, 09 July 2009 11:02
KUALA LUMPUR: The stock market traded within a narrow range yesterday as investors mostly went defensive, while selling pressure continued in plantation stocks as crude palm oil (CPO) futures fell below RM2,000 per tonne for the first time since March 31.
Though volume rose to 672.87 million units from the three-month low of 586.24 million units on Tuesday, the decline in plantation stocks kept in check any buying activity.
According to a Reuters report, market players have started to fret that optimism about the global economy’s recovery prospects and the rally in risk assets may have been overdone.
Such doubts have helped pull currencies such as the Australian dollar, sterling and euro off peaks hit last month, while the US dollar and yen have risen in the past few weeks.
CPO delivery for September on Bursa Malaysia Derivatives fell below the RM2,000 mark to a low of RM1,983 per tonne, before closing down RM67 at RM2,002.
Nymex crude oil delivery for September was trading at around US$62.30 per barrel.
On Tuesday, soybean futures, which are normally linked to CPO prices, fell to their lowest levels in seven weeks.
On Bursa Malaysia Securities, the Main Board plantation index fell 0.89% or 47.2 points to 5,281.82. The 30-component FTSE Bursa Malaysia KLCI (FBM KLCI) closed down 0.89 of a point, or 0.08%, at 1,065.47 points, while FBM Emas fell 9.36 points to 7,162.89.
In the FBM KLCI, the finance sector has the largest weightage of 34%, followed by plantation with 20.68%, power and utilities 11.34%, gaming 10.08%, telco 9.07%, transport 4.43%, and trading.
Other than crude oil and soybean prices, other weakening factors for CPO include increasing stockpiles of both soybean and CPO, as production normally increases during the second half of the year. A slower-than-expected economic recovery will result in lower demand.
The fall in CPO also contributed to the ringgit weakening against the US dollar to RM3.5632 from RM3.5454 on Tuesday.
Elsewhere in the region, Japan’s Nikkei 225 closed 2.4% lower at 9,420.75, Hong Kong’s Hang Seng Index fell 0.8% to 17,721.1 while Singapore’s Straits Times Index declined 0.6% to 2,259.77 points.
Analysts said the FBM KLCI’s lacklustre performance was also due to investors shifting their attention to the US markets once more.
“Due to the Dow Jones falling to two-month lows, the US market has become attractive once more. Thus, investors are pulling their money out of commodities and moving back in that direction,” said an analyst.
In overnight trade, US stocks fell to their lowest in 10 weeks as the country’s recovery was still very much in doubt and another fiscal stimulus package might be needed as the Dow Jones industrial average fell 161.27 points, or 1.94%, to 8,163.6. The Standard & Poor’s 500 Index fell 17.69 points, or 1.97%, to 881.03.
The analyst added that the local market would continue to look to the US for leads, but warned that less-than-positive economic data could drag down the FBM KLCI further.
Wall Street is also on the cusp of its second-quarter earnings season. Aluminium producer Alcoa, which is also a Dow component, was due to announce its results after market close yesterday.
OSK Research wrote in its report yesterday that the market was looking increasingly lethargic and that investors should start to gradually sell down.
According to the Reuters report, the yen hit its highest levels in more than six weeks against the dollar and euro as traders bet that a recent pullback in risk assets could provide the impetus for a further rise in the Japanese currency.
Sterling hit a one-month low against the dollar after weak industrial output data the previous day reinforced doubts about a UK recovery.
The dollar had fallen broadly since March, as hopes grew that the worst of the global economic recession was over, boosting risk appetite and prompting investors to shift funds out of the safe-haven dollar into other currencies and assets.
But now doubts have set in. Currencies such as the euro and sterling extended their falls against the yen yesterday, as short-term traders latched on to the theme of risk reduction, a trader for a major Japanese bank told Reuters.
“They are selling cross/yen, guessing that everyone else will sell too,” the trader said, adding that there was selling by both Japanese players as well as macro hedge funds.
The euro fell 0.7% to 131.15 yen. Earlier, the euro fell to as low as 130.96 yen, its lowest since late May.
One broker specialising in forex margin trading said Japanese retail traders were selling to unwind long sterling positions in a general sell-off of riskier currencies against the yen. Sterling dipped 0.2% to US$1.6092, hovering near a one-month low of US$1.6060 hit earlier in the day. The euro dipped 0.1% to US$1.3906.
Koji Fukaya, a senior currency strategist for Deutsche Securities, said a full-fledged return to risk aversion was unlikely.
“The trend towards a gradual economic recovery seems unchanged. But markets had staged a V-shaped rebound and there are questions about whether such moves can be sustained so there has been some correction,” Fukaya said.
This article appeared in The Edge Financial Daily, July 9, 2009.
