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MSCI set to rule on China A-shares and Brexit talks begin

Here’s what we are watching at FT markets as a new trading week looms for traders and investors.

Will MSCI include China A-shares in its globally tracked EM index?

Tuesday is showtime for MSCI, which has delayed for each of the past three years including China’s domestic A-shares in its global indices.

Having in the past cited regulation worries and accessibility for global investors, there are signs that MSCI is ready to say yes this time. Such a decision has big repercussions for global investors as it will oblige investment funds to pump billions into China’s stocks.

And MSCI has markedly altered its inclusion proposal to make it more palatable to its clients. The list of A-share companies to be included in the benchmark index will be just 169, down from 448 previously. So if A-shares are included, they will account for just 0.5 per cent of the MSCI EM Index and not a hefty 5 per cent under MSCI’s previous proposal.

Notably, BlackRock, the world’s biggest investment manager, has for the first time publicly backed the inclusion of onshore stocks in MSCI’s indices.

For China, acceptance by MSCI would mark a key step for Beijing as it seeks to open up its financial markets and attract foreign capital.

So perhaps it will be fourth time lucky for China A-Shares?

Michael Mackenzie

Watching the pound as Brexit negotiations formally start

It finally begins. Britain will open its talks to leave the EU on Monday. So far sterling has been the main conduit for neuralgia about political uncertainty as investors contemplate the market implications, while gilts have held up well, outperforming Treasuries and eurozone debt.

Both sides in the negotiations — which will take place in Brussels — will be closely watched for early indications of the shape of the eventual deal, with the rights of EU citizens living in the UK likely to prove the first major challenge.

As the economic outlook clouds over and the Bank of England contemplates the question of when to raise rates, the Conservative party faces “a difficult juggling act” if its Eurosceptic and pro-EU factions are “unable to agree between themselves what Brexit should look like”, according to George Buckley, an economist at Nomura.

While the pound ended last week above recent lows versus the dollar and euro the outlook remains cloudy.

“The financial markets [are] now expecting the final deal to be softer than what the prime minister had been initially planning”, which has supported sterling, he says. Continued political uncertainty could however weigh on the currency, he warns.

Kate Allen

What next for markets after a big week for central banks?

The long-awaited shift towards rates normalisation beyond the Federal Reserve has begun.

Last week’s surprises, in the form of the Bank of Canada’s strong hawkish tone and the Bank of England’s split vote, will have investors surveying the policymaking landscape to see who else might catch them off guard.

Kit Juckes of Société Générale suggests investors look to Australia, New Zealand and Sweden and watch their currencies closely. “Surprise shifts in the direction of travel for monetary policy have greater scope than almost anything else to move currencies at the moment,” he says.

New Zealand and Norway central banks meet this week. Both are likely to find good reasons to stay on hold, with weaker inflation offsetting the pace of economic growth.

The bigger fish for markets are the European Central Bank and the Bank of Japan, and while the BoJ last week reinforced its monetary easing position, investors think the ECB is slowly positioning itself for a change in tone.

As for the Fed, chair Janet Yellen sees no reason to rein in its rates policy but markets are sceptical. Even so, says John Hardy at Saxo Bank, the Fed’s hawkishness, combined with the ECB’s policy outlook and the surprise shifts in the BoC and BoE “all add up to a theme of global central banks withdrawing policy accommodation”.

Roger Blitz

How many more steps are required for Greek debt sustainability?

The next loan for Greece was rubber stamped this week, when the European authorities approved an €8.5bn payment which should allow the county to repay about €7bn imminently owed to private creditors over the next three months. The deal largely replicates one agreed in May, and has tentative backing from the German government and International Monetary Fund. However the debt relief measures are the same as those proposed last year, with a central aspect pushing out repayment and deferring interest on €131bn of loans made under the official EFSF programme, out of €327bn of the unrepayable total for government debt.

The European Central Bank called the deal a “first step” towards debt sustainability, but the question remains how many more of these small steps will be required. The bailout programme is supposed to leave Greece funding itself from capital markets in a year, and the possibility of a different form of support — ECB purchases of Greek debt — remains uncertain. According to economists at Citi: “the chances of a fourth bailout for Greece being needed over the next couple of years remain high, in our view, as we see it as quite unlikely that Greece could return to full market funding by the time the current programme ends in 12 months.” Meanwhile long suffering Greek voters have few concessions from their creditors to cheer, as the contemplate the next decade of enforced austerity.

Dan McCrum