Brexit marks return of sentiment-driven trading and jittery markets

PETALING JAYA: The ringgit and the local stock market saw marginal losses yesterday after the shock of result of last Thursday’s UK referendum was digested over the weekend, bucking the trend of a rebound in most regional markets.
Analysts and economists, meanwhile, cautioned that Brexit marks the start of sentiment-driven bets and jittery markets making a big comeback.
The US dollar maintained its strength yesterday, with the ringgit sliding 1.8% to an intra-day low of RM4.1660 before bouncing back to RM4.0960 at the close.
On the stocks front, the FBM KLCI fell as much as 15.8 points or 0.97% to 1,618.25 points but managed to pare losses to close at 1,629.52, down 4.53 points, or 0.28%.
MIDF Research said the equity market could be seeing further near-term foreign outflows as financial market participants may turn on their risk-off mode and resort to the “flight to safety” strategy.
As the Brexit fallout is expected to weigh more on financial markets and less on the real economy, the research house expects the forward trajectory of the FBM KLCI to remain intact but foresees heightened near-term “noise” in the market.
“On this score, we are putting our FBM KLCI year-end target of 1,750 points under review,” it said.
AmResearch head of research Anthony Dass expects the downside risk on the FBM KLCI to remain, but said it is likely limited to foreign equity shareholdings, which stood at 23.0%.
“Hence, staying on the sidelines and taking advantage of the irrationality via buying the dip in FBM KLCI every time a negative noise emerges from the UK, the EU, the US and China would be a preferred strategy,” he said.
Dass believes that the risk-off environment will have a short-term appreciation pressure over US$/RM and is likely to be transitory. “We see a level of 4.20 against US dollar as strong resistance based on net positive portfolio flows and declining risk premium,” he said.
Hong Leong Investment Bank Research economist Sia Ket Ee said while global markets swiftly priced in Brexit impact in the run up and post result announcement, he still expects continued short-term volatility given uncertain long- term risks.
“On a positive note, major central banks are committed to inject additional liquidity. Latest guidance from the Bank of England was to pump £250 billion into markets to ensure sufficient liquidity. The European Central Bank also stands ready to provide additional liquidity, if needed,” he noted. Sia maintained his year-end target of 1,690 points .
AllianceDBS Research chief economist Manokaran Mottain is of the view that the ringgit is unlikely to weaken to 4.40 against the US dollar despite the greenback’s strength.
“That is the different scenario – if US$/RM is to be 4.40, then you can see the pound sterling at 4.00 versus the ringgit,” he said.
Nonetheless, Standard Chartered Research expects high-beta currencies such as the ringgit and Indonesia’s rupiah to lead losses in Southeast Asia and South Asia, given the broader risk-off environment.
“For US$/RM, further upside is possible if risk-aversion persists. The central bank’s relatively low FX (foreign exchange) reserves, its “hands-off” approach to intervention and poor liquidity could exacerbate the move higher in US$/MR. In addition, US$/RM has one of the highest betas in the region to moves in £/US$,” it said.