Market Outlook as at September 26, 2019

FBMKLCI has been hovering around 1600 for the past 4-5 weeks. As MACD line looks set to cross below the MACD signal line, it may coincide with FBMKLCI breaking below the horizontal line at 1585-1590. If that were to happen, FBMKLCI may go down to 1550.

Chart 1: FBMKLCI's daily chart as at 26 Sep 2019, 10:30am (Source: Malaysiastock.biz)

In the next 2 weeks, the market will be focusing its attention on the likely beneficiaries from new measures to be proposed in the 2020 budget. Looking at the weekly chart, the last 3 budgets had failed to stimulate the market after their tabling. If the Government failed to announce any measure to boost the economy, then the market will likely drift lower in the next 1-2 months.

Our economy has been growing at less than 5% for the past 2 years. At this low rate of growth - some economists called it the stall speed - businesses and consumers will begin to tighten their belt. Together with our Government belt-tighten measures, due to high borrowing (thanks to profligate spending in the past) as well as its self-imposed fiscal deficit ceiling, our economy has only one way to go: Down!!


Chart 2: FBMKLCI's weekly chart as at 26 Sep 2019, 10:30am (Source: Malaysiastock.biz)

This morning, Malaysiakini carried the story of United Nations Conference on Trade and Development ('UNCTAD') issuing a warning that the world economy is in deep trouble and could well be heading into a recession in 2020. According to UNCTAD, the signs are all there; trade wars, currency movement, inverted yield curve, Brexit and the list goes on. (here). 

***

Under normal circumstances, any economy after a massive crisis would need to have a strong injection of stimulus to restart its growth engine. We saw that in 2009 when the world economy was hit by the Global Financial Crisis. 

After a period of sustained growth, the stimulus should be slowly withdrawn so that the economy can continue to grow at its own pace. Over the past few years, governments around the world have been slowly withdrawing their expansionary policies in order to achieve balanced growth. 

The withdrawal of these expansionary policies would also serve another purpose; to keep some measures or policies in reserve for deployment in the rainy days. An example of the rollback of expansionary policies is the tapering of Quantitative Easing ('QE') carried out by the US Fed since October 2017.  

Executing a withdrawal of expansionary policies after a crisis is a fine balancing act. Too little and too slow, the withdrawal will not achieve the objective. Too much and too fast, the withdrawal will send the economy in a tailspin. That's what's happening when the US Fed resorted to interest rate cut in order to cushion the slowdown in the US economy.

The job of the US Fed to engineer a slow exit from QE without crashing the economy is made more difficult because US politicians have other ideas. I am not talking about Trump's trade war but his massive tax cut, which complicates matters. The tax cut has pushed the US Government budget deficit to nearly USD1 trillion (here). 

With massive tax cuts done and QE measures substantially still in place, the US arsenals for a fight against recession are nearly fully deplored today. What else can the US government deplore if and when a recession were to show up at its door step.