Recent global stock upturn fizzles after China rating downgrade

[May 24, 2017]  By Jamie McGeever

LONDON (Reuters) - World stocks inched lower on Wednesday after China's sovereign credit rating was downgraded and as investors eyed a pause in Wall Street's four-day winning streak, the longest in over three months.

The dollar and bond yields were steady, with investors growing gradually more confident that the Federal Reserve will raise U.S. interest rates next month, while oil rose for a sixth straight day in anticipation of an OPEC-led output cut on Wednesday that may be extended to the first quarter of 2018.

The biggest loser among major currencies was the Australian dollar, which is often regarded as a proxy for China due to the country's status as a major trading partner. It posted its biggest fall in two weeks.

But markets were mostly quiet on Wednesday, lacking impetus from fresh economic or corporate drivers. Investors shrugged off the rise in Britain's terror threat level to maximum in the wake of Monday's attack in Manchester, and the slide back in market volatility helped put a floor under European and U.S. stocks.

"There's been a cautious start in Europe this morning with stocks in the red following a downgrade in the Chinese credit rating from Moody's," said David Cheetham, chief market analyst at brokerage XTB.

"After being very much at the front and center of global risk sentiment at the beginning of last year, the Chinese slowdown story has been almost forgotten, with politics throughout Europe and the U.S. taking the limelight."

Europe's index of leading 300 shares was little changed in early trading on Wednesday at 1,541 points, supported by a 0.3 percent rise in financials but weighed down by a 0.5 percent fall in basic resources stocks.

Germany's DAX was down 0.1 percent, France's CAC 40 was flat and Britain's FTSE 100 was up 0.1 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.1 percent, while Japan's Nikkei stock index ended 0.7 percent higher. MSCI's index of global shares fell 0.1 percent.

U.S. stock futures pointed to a flat open on Wall Street. On Tuesday the S&P 500 and Dow Jones Industrials edged higher for the fourth day in a row, their longest winning streak since February.

FED MINUTES

In its first downgrade of the country in nearly 30 years, Moody's cut China's rating by one notch to A1 from Aa3, saying it expects the economy's financial strength to erode in coming years as growth slows and debt continues to rise.

China's massive debt has been at the center of concerns among economists and Beijing is walking a fine line as it tries to contain financial risks.

Moody's has no specific timetable for revisiting China's rating but will monitor conditions on a regular basis, Marie Diron, associate managing director of Moody's Sovereign Risk Group, told Reuters. She said the risks to China's financial system were "broadly balanced."

People walk through the lobby of the London Stock Exchange in London, Britain August 25, 2015. REUTERS/Suzanne Plunkett/File photo

The Shanghai stock index and blue-chip CSI300 index both shed around 0.5 percent on the news but had recouped almost all these losses by the close of trade.

The Australian dollar lost nearly half a percent on the news but in early European trade had recovered to trade just 0.2 percent lower at $0.7460.

The U.S. dollar pulled away from recent 6-1/2 month lows as investors pored over President Donald Trump's first full budget plan. Containing no major surprises, the plan called for an increase in military and infrastructure spending but also cuts to social spending in areas such as healthcare and food assistance.

U.S. Treasury Secretary Steven Mnuchin said he hoped to get tax reform passed this year, though this would not happen by August.

Investors also were awaiting the minutes of the U.S. Federal Reserve's latest policy meeting, scheduled to be released at 1800 GMT on Wednesday. Fed funds futures show that traders now see a 75 percent chance that the U.S. central bank would will raise interest rates at its June meeting.

"Our U.S. economists expect the minutes to come down on the hawkish side and continue to expect the Fed to hike in June and September and announce balance sheet reduction in December," Citi analysts wrote on Wednesday.

The dollar index, which tracks the greenback against a basket of six major rivals, was flat on the day at 97.33. The greenback was up 0.1 percent against the yen at 111.90 and the euro was steady at $1.1184.

Oil prices rose again on strengthening expectations of an extension to OPEC-led supply cuts. U.S. crude was up 0.6 percent on the day at $51.79 per barrel and Brent crude futures were up 0.7 percent at $54.52.

Spot gold was flat at $1,250 an ounce.

(Editing by Catherine Evans)

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