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KLCI drops below 1000

For the second time, index composite has been dropped below 1000.

07-10-2008: KLCI closes below psychological level

KUALA LUMPUR: The Kuala Lumpur Composite Index (KLCI) dropped 19.86 points yesterday to close below the psychological level of 1,000 points amid concerns over the US economy. Opening at 1,016.7 points, the KLCI closed the day at 996.84 points, or down 1.95%, yesterday.

The drop in KLCI was in line with other regional markets. The Singapore Straits Times index closed at 2,168.32 points, a slump of 5.61% while the Hang Seng Index closed at 16,803.76 points, down 4.97%.

Based on the trading in the futures market, the worst is not over for the local bourse. The October futures for KLCI closed at 977 points, down 42 points.

“There is still an overall recession risk. People are worried that the subprime problem is spreading to Europe. We may see banks and property funds in Europe falling… so people are generally worried that the crisis is spreading. Things may be getting worse before it gets better. There could be more downpour before we see the rainbow,” Kaladher told The Edge Financial Daily.

He expected the KLCI to see resistance at 1,021 points and immediate support at 980 points.

Last week, the US Congress passed the bill for a US$700 billion (RM2.4 trillion) bank bailout plan. But the fall out from the financial crisis in the US has spread to Europe.

Last Sunday, Germany provided an unlimited guarantee on all private savings accounts and negotiated a €50 billion (RM235.1 billion) bail-out deal for Hypo Real Estate AG — the nation’s second-biggest commercial property lender. The Bank of England also raised the guarantee on deposits to £50,000 (RM303,053).

The governments are coming out or raising the guarantees to prevent a run on financial institutions on the back of a poor sentiments in banks.

Amid a tougher external economic environment, Kaladher reckons the situation in the domestic front to be challenging. “I don’t see things that rosy on the domestic front, apart from the external problems. Consumption is affected. Although oil prices have dropped, prices of good and services didn’t come down. People are more careful of their spending and that will impact the domestic front. Also, there are projects delayed,” he said, adding that the political situation was still quite unstable.

“A plus factor on the local front is that with the falling of the ringgit, it will help cushion the negative impact of the slowing demand for local exporters,” Kaladher added.

The ringgit traded lower against the US dollar as the greenback strengthened to its highest in 13 months against the euro as European governments extended financial aid to its financial institutions hit by the credit crisis.

The ringgit was weaker against the US dollar at 3.4830 yesterday from 3.4415 the Monday before.

According to Vincent Khoo, the head of research of Aseambankers, the ringgit will eventually strengthen. “The weakening of the ringgit is in line with the other Asian currencies. This has very little to do with the domestic politics as some may believe. Everything is systemic globally.

“The US dollar goes through typical cycles and remains weak throughout recession periods. This time around, it has not dropped fairly significantly. When the market sees evidence of money being ‘printed’, the US dollar will weaken and the ringgit should recover,” says Khoo.

Khoo reiterated that the KLCI’s performance was in line with the regional bourses. “Despite what people say about the political front, the KLCI dropped in line with other Asian bourses. This is a reflection of what’s happening globally,” said Khoo.

Moving forward, Khoo says it would depend on how the key western governments address the ongoing problem. “It is all about what’s going to happen next globally. The governments will have to find a way to clam the market. It is all about how you address the misgivings of the people. They (the governments) may have to come up with more implicit and explicit guarantees,” Khoo told The Edge Financial Daily.

He added that currently, global liquidity is drying up. “There is too much cash going into safe havens like the US Treasury and depositors are depositing with perceived risk free banks… so there is an unequal liquidity distribution which is a big problem now,” he pointed out.

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