A China credit rating downgrade sent shivers through emerging markets on Wednesday, though stocks later clawed back losses and hopes of an extension to an OPEC crude supply deal supported the currencies of some oil exporters. Credit agency Moody’s lowered China’s foreign currency and long-term local credit rating by one notch to A1, citing slowing growth and mounting debt in the world’s second-largest economy.
The cut to China’s credit rating – its first in nearly three decades – initially rocked Asian markets, sending China mainland benchmark stock indexes more than 1 percent lower and weighing on the yuan.
But Chinese stocks ended the session broadly flat, while the overall MSCI benchmark recovered to trade flat after suffering losses earlier in the session.
JPMorgan’s benchmark emerging market debt index only ground marginally wider, with spreads over safe-haven U.S. Treasuries edging out one basis point.
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“The reaction has been pretty muted,” said Kaan Nazli, senior economist emerging market debt at Neuberger Berman, noting that recent China data had already contributed to a pullback on commodity focused emerging markets.
“The Chinese infrastructure programme was what helped push metals prices higher in the first quarter of this year and the last quarter of last year – there is an expectation that this has run out of steam,” he said.
Moody’s downgrade of China is just the latest to affect big emerging markets, with several recently having their outlooks or ratings cut.
South Africa’s rating tumbled into junk in April, while a graft scandal engulfing Brazilian President Michel Temer prompted a number of agencies to warn of credit rating implications. S&P revised its credit outlook to negative on Tuesday.
Investors were bracing for more to come, said Neuberger Berman’s Nazli.
“However, six months from now that could very well change,” he added.
Fitch has negative outlooks on 20 emerging market countries, from Turkey and South Africa to Saudi Arabia and Sri Lanka, while Moody’s holds a negative outlook on some 25 countries.
On currency markets, oil exporters Russia and Kazakhstan saw the rouble and tenge strengthen against the dollar, supported by oil prices nudging higher on confidence that OPEC-led output cut will be extended into early next year at the group’s meeting this week.
Despite the China downgrade hitting metals and copper prices , South Africa’s rand strengthened 0.5 percent to its firmest level in a month as data showed that consumer inflation slowed more than expected.
The rand has strengthened for the fourth consecutive session, also helped by media reports that ruling African National Congress (ANC) would discuss removing President Jacob Zuma at a weekend meeting. The ANC has rejected the reports.