China cheers MSCI weight gain, yen takes the strain

World markets enjoyed a lively end to an otherwise slow week on Friday, with Chinese A-shares leaping after MSCI quadrupled their weight in its global benchmarks and strong US economic data lifting the dollar and bond yields.

China figured heavily in a sudden end-of-week flurry of news.

China’s blue-chip CSI300 index surged 2.2% to land its best week since November 2015 after MSCI’s move. It could potentially draw more than $80 billion of fresh foreign inflows to the world’s second-biggest economy.

Chinese PMI manufacturing for February had also surprised to the upside, with the fact that it remains in contraction territory for now helpfully offset by a sharp increase in the forward-looking new orders index component.

It followed Thursday’s official Chinese PMI data which also showed new orders expanding and a stronger-than-expected US GDP figure, while European shares opened up 0.5% helped by the fastest rise in German retail sales since Oct 2016.

“We are seeing a fairly decent uptick in European markets,” said CMC Markets analyst David Madden, citing the combination of US and China data as well as encouraging comments from the United States on China trade talks.

There was still grim news for the bears to claw at. Spain’s manufacturing sector contracted for the first time for more than five years in February data from Madrid showed while in eastern Europe Czech manufacturing sentiment fell at its fastest rate in six years.

Madden said though the market reaction showed that “bad news can be good news” because it could well encourage the European Central Bank to hand out another dump of cheap loans to euro zone banks in the coming months.

Long-dated government bond yields in Germany, the euro zone’s benchmark issuer, were set on Friday for their biggest weekly increase in more than year, reflecting easing concern about the global growth outlook and hopes that a no-deal Brexit will be avoided.

China had been the day’s main event though.

The jump in stocks followed a strong run already this year, with major indexes posting their best month in nearly four years in February, having been helped by expectations for government stimulus and signs of progress in US trade talks.

“Just two months ago China was facing one of the worst years it’s ever had in terms of equity market performance. So I think investors are taking very seriously the fact that the rebalancing of MSCI is happening,” said Jim McCafferty, head of equity research, Asia ex-Japan at Nomura.

Walk away 

Elsewhere in the region, Japan’s Nikkei 225 ended 1% higher, helped by a weaker yen, while Australian shares added 0.4%.

The gains in Asia contrasted with a weaker finish on Wall Street on Thursday. The Dow Jones Industrial Average fell 0.27% to 25 916 points, the S&P 500 lost 0.28% to 2 784.49 and the Nasdaq dropped 0.29% to 7 532.53.

US President Donald Trump on Thursday fuelled concerns over US-China trade talks, warning that he could walk away from a trade deal with China if it were not good enough.

But in subsequent comments Thursday, White House economic adviser Larry Kudlow called progress in the negotiations “fantastic” and said the countries were “heading towards a remarkable, historic deal.”

Mixed messages on trade combined with the collapse of the summit between Trump and North Korean leader Kim Jong Un on denuclearisation, and data from China showing slowing factory activity to pressure US stocks.

“News that President Trump walked out of the meeting with Supreme Leader Kim, because the two sides couldn’t reach an agreement over North Korea’s nuclear disarmament, dashed hopes for an easing in geopolitical tensions,” analysts at ANZ said in a morning note.

South Korea’s financial markets are closed Friday for a public holiday.

Higher yields

Better-than-expected US economic growth in the fourth quarter had little impact on US stocks. Gross domestic product rose 2.9% for the year, just shy of the 3% goal set by the Trump administration.

The GDP data lifted yields on benchmark 10-year Treasury notes. After rising to a high of 2.7222 percent on Friday, the yield eased to 2.72%, still up from a US close of 2.711% on Thursday.

Dallas Federal Reserve Bank President Robert Kaplan said on Thursday that it will take time to see how much the US economy is slowing, supporting views of the Fed’s rate-hike holiday at least through to June.

The dollar also rose on the US data, adding 0.4% against the yen to 111.80, having earlier touched a new high for the year at 111.82.

The dollar index which tracks the greenback against major rivals, was up 0.2% at 96.302, though it remained fractionally lower for the week overall.

Britain’s pound has been the star of the week. It has jumped more than 1.5% after another set of twists in Brexit saga has cut the chances of the UK crashing out the EU at the end of the month with a transition deal. It was down a fraction on the day at $1.3250

In commodity markets, US crude added 0.6% to $57.67 a barrel, and Brent crude rose 0.7% to $66.72 per barrel. Spot gold fell 0.3% on the stronger dollar, to $1 309.35 per ounce.