Asian stocks recovered slightly from a near three-week low on Wednesday as markets digest MSCI’s decision not to include domestic Chinese equities in its indexes.
Mainland Chinese shares, among Asia’s worst performers this year, were mixed while Hong Kong slid, as markets, which had expected Chinese A-shares to be included in the emerging market index, considered the announcement.
MSCI’s broadest index of Asia-Pacific shares outside Japan were down 0.1 percent. Japan’s Nikkei reversed earlier losses to rise 0.7 percent.
China’s CSI 300 index and the Shanghai Composite staged a turnaround from earlier declines to rise 0.4 percent and 0.6 percent respectively. Hong Kong’s Hang Seng index slipped 0.1 percent.
MSCI in its decision said Beijing had more work to do in liberalising capital markets, and said it wanted more time to assess the effectiveness of the Qualified Foreign Institutional Investor (QFII) quota allocation scheme and capital mobility policy changes.
MSCI said it would consider China A shares’ inclusion as part of its 2017 review and didn’t rule out a potential off-cycle announcement should further positive developments occur ahead of June 2017.
“We agree there is room for improvement in the regulatory environment and in corporate governance in the A-share market,” Steven Sun, head of China and Hong Kong equity research at HSBC, wrote in a note.
“However, we believe it is moving in the right direction…We still think inclusion is probable (possibly by year-end).”
China’s securities regulator said the decision won’t impact the reform and opening process of the country’s capital markets, adding that the country needs to build long-term, stable and healthy capital markets.
The Chinese central bank set the yuan midpoint rate at 6.6001, the lowest level against the dollar since January 2011. It eased to 6.6020 per dollar on the open, and was last trading slightly higher at 6.5978.
The offshore yuan rose to 6.6071 after earlier falling to 6.6152 to the dollar, its weakest level since early February as worries about China’s economy deepened after data showed growth in China’s fixed-asset investment slowed to a 15-year low.
On Wall Street, S&P 500 Index hit a three-week low to end at 2,075.32 on Tuesday, down 0.18 percent, in its fourth consecutive drop, led by a 1.45 percent fall in financial shares.
European shares were under more pressure, with Britain’s FTSE falling 2.0 percent to a 3 1/2-month low on fears disruptions from leaving the political and economic union could harm the UK economy, possibly sending it into a recession.
“The economic impact would occur over months and years, not immediately. But financial markets are constantly trying to look forward and discount what’s going to happen,” said Michael Metcalfe, head of global macro strategy at State Street Global Markets based in London.
“But I think the real question will become political – that a large country has decided to leave the EU,” he added.
Worries that Brexit will deal a significant blow to the integration of Europe have helped to push up borrowing costs of European countries with weak credit ratings.
The gap between 10-year Portuguese bond yields and German peers rose to 337 basis points, its widest since February. The spread for Italian and Spanish debt also rose to levels not seen since February.
Investors instead flocked to the safety of German bunds, whose yield fell below zero for the first time in history on Tuesday.
The Japanese yen also held firm, staying near a six-week high against the dollar and a 3 1/2-year high against the euro.
The yen was changing hands at 106.285 to the dollar, having hit a six-week high of 105.63 on Tuesday. The euro stood at 119.02 yen after falling to a low of 118.48.
The safehaven Swiss franc was last trading at 1.0798 per euro after rising to a 5 1/2-month high of 1.0787 in the previous session.
The British pound struggled near its two-month low against the dollar touched on Tuesday. It last stood at $1.4136, close to Tuesday’s low of $1.4091.
Concerns about Brexit dwarfed any optimism from solid U.S. retail sales data published on Tuesday.
Fed funds futures show investors see almost no chance of the Fed raising U.S. interest rates on Wednesday after the dismal U.S. payrolls report for May.
The 10-year U.S. debt yield fell to a four-month low of 1.567 percent on Tuesday and last stood at 1.6113 percent.
Oil Rises as Threat of Immediate Iran Supply Recedes
Oil prices rose on Tuesday, with Brent gaining for a fourth consecutive session, as the prospect of extra supply coming to the market soon from Iran faded with talks dragging on over the United States rejoining a nuclear agreement with Tehran.
Indirect discussions between the United States and Iran, along with other parties to the 2015 deal on Tehran’s nuclear program, resumed on Saturday in Vienna and were described as “intense” by the European Union.
A U.S. return to the deal would pave the way for the lifting of sanctions on Iran that would allow the OPEC member to resume exports of crude.
It is “looking increasingly unlikely that we will see the U.S. rejoin the Iranian nuclear deal before the Iranian Presidential Elections later this week,” ING Economics said in a note.
Other members of the Organization of Petroleum Exporting Countries (OPEC) along with major producers including Russia — a group known as OPEC+ — have been withholding output to support prices amid the pandemic.
“Additional supply from OPEC+ will be needed over the second half of this year, with demand expected to continue its recovery,” ING said.
To meet rising demand, U.S. drillers are also increasing output.
U.S. crude production from seven major shale formations is forecast to rise by about 38,000 barrels per day (bpd) in July to around 7.8 million bpd, the highest since November, the U.S. Energy Information Administration said in its monthly outlook.
Oil Prices Rise as Demand Improves, Supplies Tighten
Oil prices rose on Monday, hitting their highest levels in more than two years supported by economic recovery and the prospect of fuel demand growth as vaccination campaigns in developed countries accelerate.
Brent was up 53 cents, or 0.7%, at $73.22 a barrel by 1050 GMT, its highest since May 2019.
U.S. West Texas Intermediate gained 44 cents, or 0.6%, to $71.35 a barrel, its highest since October 2018.
“The two leading crude markers are trading at (almost) two-and-a-half-year highs amid a potent bullish cocktail of demand optimism and OPEC+ supply cuts,” said Stephen Brennock of oil broker PVM.
“This backdrop of strengthening oil fundamentals have helped underpin heightened levels of trading activity.”
Motor vehicle traffic is returning to pre-pandemic levels in North America and much of Europe, and more planes are in the air as anti-coronavirus lockdowns and other restrictions are being eased, driving three weeks of increases for the oil benchmarks.
The mood was also buoyed by the G7 summit where the world’s wealthiest Western countries sought to project an image of cooperation on key issues such as recovery from the COVID-19 pandemic and the donation of 1 billion vaccine doses to poor nations.
“If the inoculation of the global population accelerates further, that could mean an even faster return of the demand that is still missing to meet pre-Covid levels,” said Rystad Energy analyst Louise Dickson.
The International Energy Agency (IEA) said on Friday that it expected global demand to return to pre-pandemic levels at the end of 2022, more quickly than previously anticipated.
IEA urged the Organization of the Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, to increase output to meet the rising demand.
The OPEC+ group has been restraining production to support prices after the pandemic wiped out demand in 2020, maintaining strong compliance with agreed targets in May.
On the supply side, heavy maintenance seasons in Canada and the North Sea also helped prices stay high, Dickson said.
U.S. oil rigs in operation rose by six to 365, the highest since April 2020, energy services company Baker Hughes Co said in its weekly report.
It was the biggest weekly increase of oil rigs in a month, as drilling companies sought to benefit from rising demand.
FG Spends N197.74 Billion on Subsidy in Q1 2021
The Federal Government has spent a total sum of N197.74 billion on fuel subsidy in the first quarter (Q1) of 2021, according to the Federal Account Allocation Committee (FAAC) report for May.
The report noted that the value of shortfall, the amount the NNPC paid as subsidy, in the March receipts stood at N111.97 billion while N60.40 billion was paid in February.
In the three months ended March, the Federal Government spent N197.74 billion on subsidy.
The increase in subsidy was a result of rising oil prices, Brent crude oil, against which Nigerian oil is priced, rose to $73.13 per barrel on Monday.
The difference in landing price and selling price of a single litre is the subsidy paid by the government.
On May 19, the Nigerian Governors Forum suggested that the Federal Government removed the subsidy completely and pegged the pump price of PMS at N380 per litre.
The governors’ suggestion followed the non-remittance of the NNPC into the April FAAC payments, the money required by most states to meet their expenditure such as salaries and building of infrastructure.
However, experts have said Nigeria is not gaining from the present surge in global oil prices given the huge money spent on subsidy.
Kalu Aja, Abuja-based financial planner and economic expert, said “If Nigeria is importing Premium Motor Spirit and still paying subsidy, then there is no seismic shift.”
“Nigeria needs oil at $130 to meet the deficit. In the short term, however, more dollar cash flow is expected and with depreciated Naira, it will reduce short term deficit.”
Adedayo Bakare, a research analyst, said that the current prices do not really mean much for the country economically.
He said, “The ongoing transition away from fossil fuels and weak oil production from the output cuts by the Organisation of Petroleum Exporting Countries will not make the country benefit much from the rising oil prices.
“Oil production used to be over two million barrels but now around 1.5 million barrels. We need OPEC to relax the output cuts for the naira to gain.”
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