KUALA LUMPUR (June 12): Rakuten Trade has warned of a potential "perfect storm" brewing in global financial markets as mounting US debt, rising Japanese bond yields and a weaker US dollar trend threaten to rattle investors, while lowering its end-2026 target for the FBM KLCI to 1,770 from 1,800 previously.

Speaking at a virtual media briefing on the third-quarter market outlook on Friday, Rakuten Trade head of research Kenny Yee Shen Pin said the research firm's outlook was centred on what it termed a "deadly love triangle" of high debt, low interest rates and a weak currency.

According to Yee, the US national debt has surpassed US$39 trillion (RM158 trillion), with annual interest payments expected to reach about US$1.2 trillion this year.

Yee said there appeared to be limited avenues for the US Federal Reserve (Fed) to address the country's growing debt burden, suggesting the Fed would lower interest rates to reduce borrowing costs.

“This will inadvertently see a weaker US dollar, thus allowing the US government to service the debt with a cheaper dollar over a short-term basis,” he explained.

Yee said Japan faced a similar challenge with government debt there amounts to about US$9 trillion, with a debt-to-gross domestic product ratio of around 150%, compared with roughly 100% in the US.

In addition, Japan’s 10-year government bond yield has climbed to about 2.8%, the highest level since 1997, which may instigate the unwinding of the yen carry trade and stir market volatility.

“Judging by the recent aggressive selldown in global equities both on Wall Street and regionally, we reckon a progressive unwinding of yen carry trade may have already begun,” he added.

Despite trimming its KLCI target, Yee said Malaysia serves as a “decent shelter” for capital preservation amid heightened global uncertainties, supported by strong domestic institutional participation and comparatively lower volatility among its regional peers.

Still, Yee cautioned that recent domestic political developments could amplify market uncertainty. Yee noted that foreign investors were net sellers of Malaysian equities in May, resulting in RM2.3 billion of outflows during the month and wiping out earlier inflows recorded this year.

Despite the outflows, foreign shareholding on Bursa Malaysia remained relatively stable at 19.2%, suggesting that more longer-term foreign investors continue to maintain exposure to the local market, Yee added.

The lower KLCI target comes after the benchmark index lost momentum following a strong start to the year, retreating 5.6% from January's 1,771.25 peak — its highest since October 2018 — to 1,672.74 on June 3.  

At Friday's noon market break, the market bellwether settled 1.44 points or 0.09% higher at 1,680.97.

Rakuten Trade has revised down its corporate earnings growth forecast to 5.4% for 2026, from 7.9% previously, while maintaining a 6.2% growth projection for 2027. The lower figure for 2026 is attributed to the fine tuning of figures amid the ongoing geopolitical tension.

On currencies, Yee said the ringgit could strengthen to between 3.80 and 3.90 against the US dollar should the US central bank begin cutting interest rates.

Yee said the recent weakness in the ringgit was a reaction to the stronger-than-expected US labour data, which has strengthened the US dollar against other currencies.

The ringgit has weakened by 4.5% against the US dollar since its recent high of RM3.88 in February this year. At the time of writing on Friday, the local currency stood at 4.0560 against the greenback.

Meanwhile, Yee viewed that the recent pullback in the gold price appeared to be driven by profit-taking. Having said that, he expects the gold price to remain stable.

The yellow metal has retreated 20.8% from a recent high of 5,311.60 in March this year, following escalations of conflicts in the Middle East. At the time of writing, the gold price was trading at its six-month low of US$4,204.87.

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