Asian stocks were higher across the board Friday as the MSC Index said it would increase weightings of Chinese mainland shares in its EM index, which is followed by over USD 2 trillion of assets. This is a meaningful shift: EM stocks and FX responds to flows. Of course this reallocation will not occur all at once; that would overwhelm investors and disrupt normal market behaviors. Saudi Arabia and Argentina will enter the index with a total of 2.9% weight, but the big new is China A-Share weight will climb 5x to over 3%. According to Reuters the reweighing of China’s A-Shares in its EM benchmark is expected to draw over $80bn of new foreign inflows as manages replicate allocation. This week we anticipate market’s focus to move back towards the USChina trade negotiation. Despite the less then positive result from TrumpKim our baseline view is for a positive outcome. News-flow suggests positive developments fueling expectations for a announcement in the next two weeks. Elsewhere, expectation appears to be skewed towards the idea that such a currency agreement between the US and China would support CNY appreciation.
By Peter Rosenstreich