World stocks decline as China A-shares included in MSCI global benchmark
World stock markets fell on Tuesday as a drop in oil prices weighed on the energy sector, while hawkish comments from several US Federal Reserve officials pushed the US dollar to a one-month high.
After the market close, index provider MSCI said it will add mainland Chinese ‘A’ stocks to its widely followed Emerging Markets Index in a landmark decision for the global investment landscape.
“We believe our clients will benefit from today’s decision to bring Chinese equities into mainstream investment,” Ryan Stork, BlackRock’s chairman for Asia-Pacific in Hong Kong and one of its most senior executives, said in an emailed statement.
“BlackRock has continued to support all opening of investment in China’s onshore capital markets for a number of years.”
MSCI said it planned to add 222 Chinese stocks – which will have an initial weighting in the index of just 0.73 per cent.
The full inclusion of domestic Chinese stocks in the widely tracked MSCI Emerging Markets Index could eventually pull more than US$400 billion of funds from asset managers, pension funds and insurers into mainland China’s equity markets over the next decade, according to analysts.
BlackRock manages US$5.4 trillion in assets and is a major MSCI client.
The Dow Jones Industrial Average fell 61.85 points, or 0.29 per cent, to 21,467.14, the S&P 500 lost 16.43 points, or 0.67 per cent, to 2,437.03 and the Nasdaq Composite dropped 50.98 points, or 0.82 per cent, to 6,188.03. The Dow and benchmark S&P 500 hit fresh record highs on Monday, buoyed by a rebound in the tech sector.
The pan-European FTSEurofirst 300 index lost 0.66 per cent and MSCI’s gauge of stocks across the globe shed 0.69 per cent.
The US dollar strengthened for a second day, hitting a one-month high of 97.871 against a basket of major currencies as Federal Reserve officials maintained a hawkish tone on hiking interest rates.
Oil fell about 2 per cent, with Brent settling at seven-month lows and US crude is at its cheapest since September, after increased supply from several key producers overshadowed high compliance by OPEC and non-OPEC oil producers with a deal to cut global output.
That slide weighed down energy stocks on Wall Street and in Europe. The S&P energy index dropped 1.3 per cent as the worst-performing of the 11 major S&P sectors and Europe’s oil and gas sector slumped 2.2 per cent.
“People really thought US$45 to US$55 was kind of the range of oil, but it is getting weaker and weaker and US producers are getting more and more efficient,” said Ken Polcari, director of the NYSE floor division at O’Neil Securities in New York. “So if that is the case, they are going to keep pumping.”
US crude settled down 2.2 per cent at US$43.23 per barrel and Brent settled 1.9 per cent lower at US$46.02. The drop put US crude in a bear market, traditionally defined as a drop of more than 20 per cent from a recent high.
On Monday, New York Fed President William Dudley said halting the rate-hiking cycle now would imperil the economy. That was followed by Boston Fed President Eric Rosengren, who said on Tuesday the era of low interest rates in the United States and elsewhere poses financial stability risks.
In addition, Chicago Federal Reserve Bank President Charles Evans said he was increasingly concerned that a recent softness in inflation is a sign the Fed will struggle to get price pressures back to its 2 per cent objective. Dallas Federal Reserve President Robert Kaplan said the Fed needs to be careful about raising US interest rates further due to low rates on 10-year Treasuries.
The dollar index rose 0.24 per cent, with the euro down 0.2 per cent to US$1.1126. The greenback is up nearly 1 per cent for the month.
Sterling was last trading at US$1.2624, down 0.85 per cent on the day. Bank of England Governor Mark Carney doused speculation that he might soon back higher interest rates, telling bankers on Tuesday that he first wanted to see how the economy coped with Brexit talks in coming months.
Benchmark 10-year Treasury notes last rose 9/32 in price to yield 2.1565 per cent, down from 2.188 per cent late on Monday.