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MSCI says no to China A-share inclusion

The big news today is that the MSCI has decided to delay plans for a greater inclusion of Chinese shares within its emerging markets indices.

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Source: Bloomberg

Many global fund managers are forced to buy the index, and were China to be included, a steady inflow of funds was predicted to find its way into China’s capital markets. Chinese markets look to be in for a difficult day, as many had rallied over the past week in expectation of MSCI inclusion. The ASHR Deutsche X-trackers Harvest CSI 300 China A-Shares ETF lost 2% in after-hours trading in the wake of the MSCI decision.

In some ways, it was more surprising how many investment banks came out saying inclusion was more likely than not. I think this may reflect just how aggressive Chinese government campaigning was for inclusion at this round. But very recent changes to stock suspension laws was unlikely to make everyone forget about the massive state intervention in the market of the past year. Or the disastrous introduction of trading “circuit-breakers” in January that did an excellent job of accelerating the market selloff, and eventually cost Xiao Gang his job as the head of the China Securities Regulatory Commission (CSRC).

Brexit worries and general macro concerns continued to weigh on markets last night as European markets had a rough session and the S&P 500 saw its first four-day decline since February. However, the overnight economic data releases were far more upbeat. Eurozone industrial production for April handily beat market estimates, increasing 1.1% month-on-month against expectations for a 0.8% increase.

US retail sales also came in better than market expectations with headline retail sales in May increasing 0.5% MoM against expectations for 0.3%. And core retail sales, in particular, look to be trending higher with two back-to-back months of over 3% year-on-year growth.

However, the poor leads from global equities and likely selling in Chinese markets are likely to see another bout of selling in Asia today. The US dollar rallied sharply overnight with the DXY dollar index gaining 0.6%. This did not help the commodities complex as iron ore lost 4.4%, its biggest one day loss in three weeks. US API crude oil inventories also added 1.16 million barrels last week, which also helped WTI oil lose 2% overnight and drop into the US$47 handle. WTI oil is now sitting at a key level around US$48, and a break lower could see it push back to US$44-45.

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Click to enlarge

We’re calling the ASX to open up 0.5% lower, with the materials and energy spaces in for a difficult day in particular. A2M has raised their FY16 sales and earnings guidance, which is likely to see them rally at the open. And RIO has announced that they will buy back A$1.7 billion of their 2018 debt, improving their leverage ratio, which should improve investor sentiment on the stock, but overnight developments in iron ore and China may prove bigger concerns for trading today.

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