You are here

Stock slump worsens before Fed as MSCI China decision sinks yuan

Wednesday, June 15, 2016 - 09:29
yuan15.jpg

[WELLINGTON] The global stock selloff deepened in Asia as anxiety over Britain's potential exit from the European Union continued to weigh on risk assets ahead of the Federal Reserve's policy review. China's yuan fell after MSCI Inc denied local equities entry into their indexes.

The regional equity benchmark fell a fifth day, extending its longest decline in a month, with polls indicated mounting support for the UK leaving the bloc contributing to a loss of more than US$2 trillion in global equity value since last Thursday.

Emerging-market currencies slipped and US crude broke below US$48 a barrel, as the pound held near a two-month low. The yuan slipped to its weakest level since early February in offshore trading.

MSCI's decision, which came despite Chinese efforts to address the index compiler's concerns, has landed in the middle of a volatile week for markets, with Britain's June 23 referendum emerging as a key concern for traders and central banks in the US, Japan and UK meeting.

MSCI, whose emerging-markets index is tracked by investors with US$1.5 trillion in assets, said more improvement in access to the mainland stock market was needed, a setback for Chinese leaders who have striven to lure offshore capital and turn the yuan into an international currency. The Fed's statement is due late on Wednesday.

"The MSCI decision is a disappointment and the risk-off sentiment prevails," James Audiss, a senior investment adviser at Shaw and Partners in Sydney, which manages about A$10 billion (S$9.96 billion), said by phone.

"Fear is ruling the day with Brexit worries and the upcoming Fed commentary. There's going to be more volatility."

The MSCI Asia Pacific Index dropped 0.4 per cent as of 9:38 am Tokyo time, bringing its five-day retreat to almost 5 per cent. Japan's Topix index lost 0.6 per cent, led lower by mining companies and utilities, while the Kospi index in Seoul retreated 0.4 per cent.

Raw materials and energy producers drove Australia's S&P/ASX 200 Index down 0.6 per cent as New Zealand's S&P/NZX 50 Indextraded little changed, following two days of losses.

Futures on the S&P 500 Index were down 0.2 per cent to 2,063 after the US benchmark lost that amount on Tuesday, to close at a three-week low. MSCI's All-Country World Index declined for a fourth day, its longest run of losses since February.

Ahead of the Fed's decision, investors will be looking for consumer confidence data out of Australia, and updates on Malaysian consumer prices, Singapore retail sales, Japanese machine-tool orders and Indonesian trade. Sri Lanka reports on gross domestic product Wednesday.

The yuan dropped to 6.6155 per dollar in Hong Kong, its weakest level since Feb 4, following the onshore rate's slump to a five-year low on Tuesday. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF slipped about 2 per cent in after- market trading in New York, after rallying 1.3 per cent in the ordinary session.

"This is shocking, a lot of people felt like on paper this is a done deal after all the work that the Chinese government has done to address the transparency and accessibility concerns," Brendan Ahern, chief investment officer at KraneShares, which oversees four China-focused ETFs, said by phone Tuesday.

"A positive decision would have forced investors to take a closer look at China. Even so, a lot of investors see opportunity in the onshore market, and it's a question of when MSCI will include China into its indexes, not if it will do so."

The pound was little changed at US$1.4114 after sliding 1.1 per cent on Tuesday, after as many as five opinion polls indicated the campaign for the UK to leave the EU had moved ahead.

BLOOMBERG