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Reuters
LONDON
South Africa's rand bounced against the dollar on Monday after the country avoided a double downgrade of its local currency debt, although broader emerging markets fell amid jitters over weakness in Chinese and tech shares.
Emerging equities fell one percent dragged down by heavy selling in Asia where Chinese stocks resumed their slide and semi-conductor companies also lost ground.
But a dollar index languishing at two-month lows offered fresh impetus to the rand, which benefited from only S&P Global cutting it to junk on Friday, whilst Moody's kept it on review.
A cut by both agencies would have ejected South Africa's $125 billion debt market from key bond indexes, potentially triggering more than $10 billion in debt. But S&P cut South Africa's rating to 'BB+'while Moody's decided against a downgrade.
The rand bounced 1.7 percent, after tumbling 2 percent on Friday, whilst average yield spreads of South African dollar bonds over Treasuries narrowed by 5 basis points (bps) to 282 bps, a near one-month low.
Yields on benchmark local bonds rose around 6 bps, though South Africa's average premium versus other emerging debt on the GBI-EM index is approaching 400 bps.
"The market is taking it quite well as it's not a double downgrade which was the worst case,"said Manik Narain, an emerging FX strategist at UBS.
"But I don't think this is a very strong buying opportunity given the downside risks that are still ahead. This is a 2-3 percent current account deficit economy with significant risks of outflows."
South Africa said it would use next year's budget to strengthen its fiscal framework.
Simon Quijano-Evans, an emerging markets strategist at Legal & General Investment Management, noted that Moody's had kept South Africa eight notches above Ukraine,"sending a very wrong message to governments, namely that reforms just don't matter".
He added credit default swaps (CDS) showed markets pricing in more downgrades for South Africa, noting its five-year CDS at 191 bps prices higher risks than in worse-rated Croatia.
Elsewhere, heavy selling across Asia pushed MSCI's benchmark emerging stocks index to one-week lows, after Chinese blue chips fell 1.3 percent adding to the previous week's losses.
Investor confidence has been dented by rising bond yields and authorities'efforts to crack down on leverage.
The selloff came despite a surge in Chinese industrial profits in October.
South Korean stocks also tumbled 1.4 percent to a near one-month low amid a slump in tech shares following a Morgan Stanley report that the memory chip boom was peaking.
Samsung Electronics shares fell 5 percent to a one-month low. Taiwan shares also fell around 1 percent.
But dollar weakness lifted many emerging currencies, with even the Turkish lira, which plumbed record lows last week, up 0.2 percent.
The forint also firmed 0.4 percent against the euro to a near three-week high as China pledged over $3 billion for regional investment projects.
