The main news today from the Asian session is that ratings agency Moody’s has downgraded China from A1 to Aa3 as well as changing the outlook from stable to negative. After opening lower the FTSE 100 has pared these losses and currently trades higher by around 10 points at the time of writing. The pound is also higher on balance as sterling recovers most of Tuesday’s declines and remains in wait-and-see mode ahead of its next sustained move.
Chinese concerns to re-emerge
The first downgrade to China from Moody’s in almost 30 years has caught the attention of traders this morning as the almost forgotten narrative of a slowdown in economic activity in the Far East could be set to return. The latter parts of 2015 and early 2016 were dominated by growing concerns surrounding the state of the world’s second largest economy as fears of a hard landing in China soured global risk sentiment. Since then however, this theme has been largely overlooked as political shocks in the UK and US - as well as the absence of a political shock in France - have been the main driving factors for markets.
Cause for concern rather than panic stations
Closer inspection of the report from Moody’s suggests this is a measured move based on an expectation that China’s financial strength will “erode somewhat” over the coming years. However the publication also reveals that the the “risks are balanced” and the GDP will remain “high compared to other sovereigns” so the news in itself shouldn’t be ringing too many alarm bells just yet. Having said that, a likely result of the downgrade is a pique in traders’ interests once more to events in China and there will now be a growing focus on whether other ratings agencies follow suit. It’s likely that there will also be increased scrutiny of upcoming Chinese data, with PMIs and industrial production figures scheduled to be released in the next month.
Oil catching a bid into OPEC
The price of oil has risen to its highest levels in over a month this morning as traders are seemingly positioning for a favourable outcome from tomorrow’s bi-annual OPEC meeting. Members of the organisation are set to convene in Vienna on Thursday with the main topic of discussion being whether to extend, and even deepen, the production cuts which have been in place since the start of the year in an effort to support the oil price.
The rhetoric from attendees has been positive in the run-up to this potentially major event and as such there is ample scope to disappoint. With expectation levels elevated it appears that the cartel may need to go further than a six-month extension to their current output quota. The current agreement to reduce production levels by 1.8m barrels per day (bpd) for 6 months from January 1st 2017 was announced at the previous meeting last November and if only an extension through the end of the year is announced tomorrow there could be disappointment amongst oil bulls.
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