Financial market research and analysis

The US dollar and the US yields improved on Federal Reserve (Fed) member Dudley’s optimistic view of the US economy. William Dudley, who is known as a dovish Fed member, said that the strength in the US labour market should translate into higher wages and prices, and that the financial conditions in the US remain loose despite the interest rate hikes. Three other Fed members, Fisher (hawkish), Rosengren (non-voting member) and Kaplan (balanced) are due to speak today.

The Dow Jones closed the Monday’s session at a fresh all-time high of $21’528.99, as NASDAQ 100 advanced by 90.74 points. The US stock futures extended their advance in Asia, hinting that the US stocks could resume gains through the unchartered territories later in the session.

Equity rally extended to Japanese stocks. Nikkei (+1.12%) and Topix (+1.01%) surged in Tokyo, as the USDJPY cleared resistance at 111.60 (50 and 100-day moving averages). The next reasonable target stands at 112.15 (38.2% retrace on December – April decline & 200-dma).

Gold slipped below $1’245 on improved US yields and remained offered at the 100-day moving average ($1’246). Gold bears’ next major target stands at $1’238 (200-day moving average).

The FTSE futures remained flat on stagnation in oil and commodity prices in Asia. Soft pound remains supportive of the FTSE stocks, but the Brexit risks are looming.

The Brexit talks officially started yesterday. The UK has a blurry vision on the Brexit and therefore finds itself in a difficult position as the negotiations begin. The political environment inside the UK is tense following the June 8 election’s dramatic outcome for PM Theresa May and the Tories. From the very beginning of the negotiations, the UK government had to give in to the EU’s request to discuss the terms of the divorce before mentioning any possibilities on an eventual trade deal posterior to the UK’s separation from the union. Although the markets tend to price in a softer Brexit, the EU is currently showing teeth.

The GBPUSD trades under pressure, as the third test of 1.2824-resistance (minor 23.6% retrace on March – June rise & June triple top) has been unsuccessful. Support is eyed at 1.2658, (100-day moving average), if broken, should pave the way for a further slide to 1.2577 (50% retrace) and 1.2536 (200-day moving average).

The EURGBP sees support at 0.8735 (minor 23.6% retracement on April – June recovery). Trend and momentum indicators are supportive of a further positive development toward 0.8868 (June high), before 0.8897 (major 61.8% retrace on September – April decline). The key support to the monthly positive trend stands at 0.8655 (major 38.2% retrace).

The pound appreciation is expected to attract the Bank of England (BoE) hawks against the euro and the US dollar approaching 0.89 and 1.25 levels respectively, given the recent hawkish shift at the heart of the BoE’s MPC.


Will Chinese A-share stocks be included in MSCI global indices?

It is an important day for the Chinese stocks. The Morgan Stanley Capital International (MSCI), will decide whether or not the Chinese A-shares will finally be included in its international stock indices, MSCI China and MSCI EM.

The MSCI has refused to include the Chinese stocks in its international benchmarks due to strict capital controls by the Chinese government, trading restriction and long interruptions in times of bearish market.

A fourth rebuff is possible and highly probable as Morgan Stanley analysts estimate the probability of inclusion slightly above 50%. Golden Sachs analysts revised this probability to 60% from 70% a year earlier.

Of course, not all stocks will be a fit for the MSCI’s global indices. The MSCI will consider 169 A-share stocks which could be potentially included in the MSCI indices, compared to 448 companies considered in 2016.

The narrowing scope means that only China’s most competitive stocks will be in examination this week and it is well possible that some of these stocks successfully become part of the MSCI global indices

It is important to note that even in case of a positive response for all of the stocks eligible for inclusion, the nominal impact will be minor. In fact, the Chinese A-share stocks will represent roughly 0.5% of the MSCI China index and less than 2% of the MSCI EM index.

However, the psychological impact of the A-shares’ international recognition would be an important step for the future of the Chinese stock markets. Although China’s rising overseas businesses, increasing global influence and the government’s efforts to reform the financial markets are meant to provide international investors a more business and trading friendly conditions, the skepticism regarding the Chinese onshore stocks remained relatively high. A foot in the MSCI could wet the skeptical investors' appetite and generate a positive synergy across the market.

In the long-run, being part of the MSCI means increased and relatively stable inflows in the Chinese stocks, which will in turn decrease the volatility and restore macro investors’ confidence in stocks operating in the world’s biggest emerging market.