Daily Posts

MSCI’s Aug Rebalance Pro Forma Released, July Export/Import & FX Reserves

Key News

  • Asian equities followed the US rebound following several positive developments:
  • After the US market close, MSCI released their pro forma for the August 27th trading which includes the next China A inclusion.
  • In the central bank race to zero percent interest rates, the Philippines joined the party after Wednesday’s cuts from India, New Zealand and Thailand. The PBOC continues to deny an interest rate cut is coming.
  • Markets were given a boost by unexpectedly strong July import/export data. We also had several positive earnings that kept the positive momentum going.
  • One of our Asia brokers noted that mainland brokers have seen their refinancing ratios eased by 80bps. A similar move in 2014 was an early catalyst for the strong market move that year.
  • The PBOC set the daily reference rate for the RMB at 7.0039 per dollar, stronger than what analysts predicted, and aims to keep fluctuations within 2% of the target rate

July Trade in US $ Year over Year

Exports3.3% versus estimate -1% and June’s -1.3%
Imports-5.6% versus estimate -9% and June’s -7.3%
Trade Balance$45.06B versus estimate $42.65B and June’s $50.98B

July Trade in CNY YoY

Exports10.3% versus estimate 7% and June’s 6.1%
Imports0.4% versus estimate -3.3% and June’s -0.4%
Trade Balance$310.26B versus estimate 310B and June’s 345.18B

Takeaway: The unexpectedly strong July export numbers were a result of increased exports to the EU as US imports fell month over month and year over year. In response to US tariffs and a fairly common unintended consequence of playing checkers instead of chess, China lowered tariffs on most other countries leading to a pick up in trade. Imports fell less than expected, which is driven to some degree by lower commodity prices. While tariff front running may have been a factor, as the middle person in global trade, China could see headwinds from global growth slowdowns. 

July FX Reserves:$3.103 trillion versus estimate $3.105 trillion and July’s $3.119 trillion

Takeaway: Unless this plunges it isn’t deemed a newsworthy event.

Highlights of MSCI’s Pro Forma Released last night. The pro forma is in advance of the Quarterly Index Review scheduled for implementation/trading at the close of August 27th.

  • 260 Chinese A-shares will have 5% of their market cap added to MSCI indices, including Emerging Markets. This inclusion is following 5% of their market added in 2018 and 5% in May.
  • The 260 Chinese A-shares will represent 2.46% of MSCI EM post the August rebalance.
  • 500 of the 1,204 stocks in MSCI EM will be Chinese companies as China’s % weight increases to 31.6%
  • Korea’s % weight falls to under 12% to 11.% with only 114 stocks.
  • 10 of the 11 stocks added to MSCI EM were Chinese companies. Chinese companies’ continued dominance amongst the newly included names aligns with the previously disseminated view that China’s weight within EM will only grow further. Other countries will see their market cap weight decrease as MSCI continues to add more Chinese stocks to their indices. Remember there are +3,000 stocks in China and MSCI is only adding 500 thus far.
  • One broker puts the MSCI inflows at a few $ billion though another was over $20B. I am in the latter camp despite EM outflows of late.

The Hang Seng gained +0.48%/+123.7 index points to close at 26,120 on lighter volumes day over day and back below the one year average following volume surges on Monday and Tuesday. Breadth was strong with 37 advancers and eight decliners as index heavyweights Tencent +1.12%/+31 index points, AIA +0.52%/+14.5 and Techtronic Industries +4.06%/+9.9 index points. Tencent was up 2% but came off in afternoon trading. The HK stocks within the MSCI China All Shares gained +0.86% led by discretionary +2.37% led by autos, staples +1.98%, tech +1.94%, industrials +1.26%, and healthcare +107%. The only sector down on the day was energy -0.01%. Southbound Connect volumes were light though buyers were out with volume leader CCB seeing outsized buying.

The Shanghai & Shenzhen gained +0.93% and +1.01% on light volume but strong breadth as 2,409 advancers and 1,036 advancers. Mega cap and small caps outpaced mid-caps on the day. The mainland stocks within the MSCI China All Shares gained +1.22% as staples and discretionary gained +1.67%, healthcare 1.6%, tech 1.54%, financials 1.47% and utilities 1.26% as all sectors gained on the day. Northbound Connect flows were moderate with discount buyers out in force as foreign investors purchased $361mm of mainland stocks after selling -$432mm Wed, -$423 Tues and -$491mm Monday. 

CNY 7.04 versus 7.03

Yield on 1 Day Chinese Gov’t Bond 1.9% versus 1.94% 

Yield on 10 Year Chinese Gov’t Bond 3.1% versus 3.13% 

Yield on 10 Year China Development Bank Bond 3.55% versus 3.57%

Commodities rebounded on the Shanghai & Dalian Exchanges with Dr. Copper +0.61%.