A renewed slump in oil prices to seven-month lows put Asian investors on edge on Wednesday, overshadowing a decision by US index provider MSCI to add mainland Chinese stocks to one of its popular benchmarks.
The slide in energy costs boosted bond prices and flattened yield curves as investors priced in lower inflation for longer, while safe-haven flows underpinned the US dollar.
The spread between yields on US five-year notes and 30-year bonds shrank to the smallest since 2007 as investors wagered the Federal Reserve might have to delay further rate hikes.
MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.8 per cent, with Australia’s commodity-heavy market down 1.5 per cent. Japan’s Nikkei eased 0.45 per cent. In Europe, futures for the Eurostoxx 50, DAX and FTSE were all off 0.3 per cent.
Oil had shed 2 per cent on Tuesday as increased supply from several key producers overshadowed high compliance by OPEC and non-OPEC producers on a deal to cut global output.
The drop took US crude down 20 per cent from its recent high and thus into official bear territory, a red flag to investors who follow technical trends. On Wednesday, Brent eased 10 cents to $45.92 a barrel, while US crude futures lost 6 cents to $43.45.
Saudi’s new Crown Prince
Adding to the uncertainty was news Saudi Arabia’s Crown Prince Mohammed bin Salman had replaced his cousin in a sudden shift that made King Salman’s 31-year-old son next ruler of the kingdom.
The hit to energy stocks saw the Dow end Tuesday down 0.29 per cent, while the S&P 500 eased 0.67 per cent and the Nasdaq 0.82 per cent. E-Mini futures for the S&P 500 were 0.1 per cent lower on Wednesday.
Joining the club
The acceptance of some Chinese “A” shares into MSCI’s Emerging Markets Index was seen as a symbolic win for Beijing after three failed attempts. Yet the step is still a small one.
Only 222 stocks are being included and, with a weighing of just 5 percent, they will account for only 0.73 per cent of the Emerging Markets Index.
MSCI estimated the change, due around the middle of next year, would drive inflows of between $17 billion and $18 billion. China’s market cap is roughly $7 trillion.
The index provider set out a laundry list of liberalisation requirements before it would consider further expansion.
“We suspect that it will be a long time before this happens,” wrote analysts at Capital Economics in a note.
“While China’s weighting in the MSCI Emerging Markets Index may ultimately rise to 40 per cent or so, this rise is likely to be slow,” they added. “The upshot is that any initial boost to equities is likely to be small.”
The initial reaction was indeed restrained, with China’s CSI300 index up 0.5 per cent.
MSCI also said it would consult on adding Saudi Arabia to the emerging markets benchmark and that Nigeria will remain a frontier market, but it shocked many emerging market investors by declining to upgrade Argentina from the frontier market category.
In currency markets, the flight from oil benefited the US dollar – the two often move inversely. Against a basket of currencies, it was holding at 97.736 having touched a five-week peak overnight.
The euro stood at $1.1131 after hitting a three-week low, while the dollar eased a touch on the yen to 111.27.
Sterling was still nursing losses at $1.2626. It took a spill after Bank of England Governor Mark Carney hosed down speculation that he might soon back higher interest rates, saying he first wanted to see how the economy coped with Brexit talks.