Currency & interest rate, something to be monitored closely

Contrary to what is taught in conventional textbook, personally I believe liquidity carries more weight than economic condition in influencing the stock market movement.

For instance, is the 100% increase in house price in Klang Valley since 2009 justified by the moderate growth in the economy or our salaries/ earnings? Low interest rate and easy financing basically were the reasons for the property boom since 2009.

Giving another example, I do not think the earnings of giant consumer stocks like BAT, NESTLE, DLADY multiplied proportionately to the increase in share price. The surge in share prices of these stocks outpaced the increase in earnings and  dividend payout and hence, these stocks are being traded at high PE multiples and the dividend yields are compressed. Again it is market liquidity rather than the earnings itself that caused the sharp rise in share prices

Interest rate and currency exchange rate are two relevant indicators of liquidity.

Low interest rate in the US encourages USD carry trade and as a result, the global stock markets are flooded with liquidity. Funds with low borrowing costs are chasing for yield and that is one of the main  reasons for the surge in dividend stocks like NESTLE, DLADY, MAXIS etc.

Normalisation of the interest rate could trigger unwinding of carry trade and withdrawal of funds from stock markets. Therefore, interest rate is a financial figure to be monitored closely.

The relationship between stocks in Bursa Malaysia and currency exchange rate can be better explained by portfolio balance approach whereby the strength of currency and strength of stock price are positively correlated. Both KLCI and RM/USD has significant and strong relationship. The outlook of the movement of currency exchange rate may give a hint of the outlook of local stock market and movement of currency exchange rate shall not be neglected when forecasting the direction of KLSE.

The US 10-year bond yield has crept up and crossed above the 2.00% mark...

RM has depreciated and the RM/USD has broken the resistance at 3.06

While it is not significant at the moment, further increase in the interest rate and depreciation of RM could trigger outflow of fund from the Bursa Malaysia. These two figures should be monitored closely for the market direction.