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Asia ETF Roundup (Market) – May 2017

China’s credit rating downgraded by Moody’s.

Jackie Choy 08/06/17

For the latest ETF industry news, please refer to our “Asia ETF Roundup (Industry) – May 2017”.

Major Markets Performance 
“Sell in May and go away” was not the pattern of behavior we saw play out last month. Major global equity markets ended the month with gains. The S&P 500 notched a fresh all-time high during the month and ended the month with a gain of 1.2%. More notably, the VIX (CBOE Volatility Index, which is considered a measure of the US equity market volatility, based on real-time prices of options on the S&P 500 Index), hit a 23-year low during the month. The FTSE 100 also fetched a new all-time high during the month, ahead of the UK general election on 8 June, and surged by 4.4% by month’s end. Korea’s KOSPI rose sharply, climbing 6.4% as the country welcomed new president Moon Jae-in. Meanwhile, the Chinese equity markets had mixed performance. The HSCEI rose 3.7% and the CSI 300 rose 1.5%, but the Shanghai Composite dropped 1.2%. Emerging- and frontier-markets’ monthly performances were mixed. The Brazilian stock market stood out from the crowd with a 5.2% decline (measured by the MSCI Brazil Index in USD terms) amid bribery allegations involving the country’s president.

The ICE USD Spot Index fell 2.1% in May, putting its year-to-date decline at 5.2%. The Euro gained another 3.3% against the U.S. dollar, putting its year-to-date gains at 6.6% versus the greenback. Asian currencies’ performances against the U.S. dollar were generally positive. Most notably, the Chinese yuan rose 1.1% against the U.S. dollar.

Precious metals’ prices were little changed in May. Gold prices ended the month flat while the price of platinum rose 0.1% and silver’s price dropped 0.6%.

Economic and Market News

Will the U.S. Federal Reserve Hike in June? Brazil Cuts Rates

  • U.S. Keeps Rates Unchanged – On 3 May 2017, the Fed’s FOMC announced it had decided to leave the federal funds rate unchanged. In the minutes from the FOMC meeting released on 24 May, it was revealed that: “Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.” The next FOMC meeting will be on 13-14 June.
  • Brazil Cuts Rates by 100bps – On 31 May 2017, the central bank of Brazil decided to reduce the Selic rate by another 100 basis points to 10.25%--a 3-year low. This is the fourth rate cut this year. The Bank’s statement indicated that the convergence of inflation to the 4.5% target inflation over 2017 and 2018 is compatible with the further rate cut.



China-Hong Kong Bond Connect – Northbound First, No Launch Date Yet
On 16 May, People’s Bank of China (PBoC) and Hong Kong Monetary Authority (HKMA) jointly announced they would approve the collaborations of clearing agencies in China and Hong Kong in establishing Bond Connect. Bond Connect is an arrangement that will enable Mainland and overseas investors to trade bonds tradable in the Mainland and Hong Kong bond markets. It was also announced that only Northbound will be allowed in the initial phase, while Southbound trading will be explored in due course. However, the launch date of Bond Connect has yet to be announced.

China’s Credit Rating Downgraded by Moody’s; HK Credit Rating Followed
On 24 May 2017, Moody’s downgraded China’s long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3 and changed the outlook to stable from negative. This is the first downgrade of China by Moody’s since 1989. Moody’s cited that “The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.” Following China’s downgrade, Moody’s also downgraded Hong Kong’s local currency and foreign currency issuer ratings to Aa2 from Aa1 and changed the outlook to stable from negative. Moody’s viewed that the tightening economics, financials and political linkages with China will continue to have significant impact on Hong Kong’s credit profile.

Chinese Economic Data: Inflation Rises to1.2% in April; Caixin/Markit PMI Slides to 49.6, Official PMI Remains at 51.2

  • China’s inflation rate rose for the third consecutive month, registering at 1.2% in April. This compares to a March reading of 0.9%. Recall that the Chinese government set its inflation target for 2017 at 3%.
  • China’s official PMI reading for May 2017 registered at 51.2, even with April.  Meanwhile, the Caixin/Markit Purchasing Managers' Index registered at 49.6 in May, lower than April's 50.3, indicating contraction in manufacturing for the first time in 11 months. 
About Author Jackie Choy

Jackie Choy  

is the director of ETF Research for Morningstar Investment Management Asia