Chinese stocks were shaken out of their May torpor after Goldman Sachs Group Inc. said it was likely the nation’s shares would be included in MSCI Inc.’s global benchmark indexes.

The Shanghai Composite Index jumped 3.3 percent at the close for its biggest increase in almost three months. The gains were accompanied by a pick up in turnover, which had fallen to levels last regularly seen in 2014, while brokerages surged. The rally was uninterrupted by a sudden plunge in stock-index futures, which fell by the 10 percent daily limit before snapping back in less than a minute.

The odds of Chinese stocks winning MSCI inclusion have increased to 70 percent from 50 percent just last month, thanks to new rules aimed at curbing trading halts and a clarification by the regulator about beneficial ownership rules, Goldman Sachs said Tuesday. The Shanghai gauge still dropped 0.7 percent in May, extending the world’s worst performance this year, amid concern the economic slowdown will hurt earnings and as the yuan heads for its biggest monthly loss since August’s devaluation.~

“The market is expecting that mainland shares will have a pretty high chance of joining the MSCI’s global indexes next month,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co.

Eoin Treacy's view

The prospect of MSCI membership was one of the contributing factors in the spike experienced by mainland Chinese shares last year. When the decision was to wait and see rather than approve membership the market was robbed of a potent source of demand and the leverage that had built up with the introduction of options trading was put under pressure. 

The mainland market is only now beginning to price in the potential that MSCI will make a positive decision. Today’s upward dynamic is the largest since the beginning of the year and signals a low of at least near-term significance. A sustained move below 3000 would be required to question potential for additional upside. 

Regardless of whether the A-Shares are added to the MSCI Emerging Market basket on June 14th there is a strong likelihood US listed ADRs will move from having half their free float included to a full weighting. That should act as a bullish catalyst for the sector at the very least until the actual decision is announced. 

Baidu, for example, exhibits a large triangular pattern. it is rallying from the region of the most recent higher reaction low, but a sustained move above $200 would confirm a break in the progression of lower rally highs and signal a return to medium-term demand dominance.
 
Alibaba continues to hold mostly above the 200-day MA and a sustained move below $77 would question potential for additional higher to lateral ranging.