File picture: Alex Grimm

London - South African bank shares fell 2 percent on Wednesday after a credit ratings downgrade, while Moscow stocks took a breather after an eight-day rally fuelled by hopes that tensions over Ukraine would defuse.

MSCI's broader emerging equity index traded just off three-year highs, hit on Tuesday when the market tracked Wall Street higher.

South Africa's banking index fell heavily, however, reacting to Moody's decision to downgrade four lenders citing a lower likelihood of support from the central bank to protect creditors after a debt crisis at African Bank.

Moody's cut by a notch the long-term local currency deposit ratings for Standard Bank of South Africa, FirstRand, Nedbank and Absa Bank, the local operation for Barclays Group Africa.

The ratings agency said it was adjusting its view following the $1.6 billion (R17 billion) bailout of African Bank by the South African Reserve Bank.

“Maybe this (ratings move) is a little bit premature, they probably could have waited another six or so months to see what happened,” Richard Segal, emerging markets strategist at Jefferies in London said.

“If you look at most of the other key banks, they are much more bullet proof. They have far more diversified businesses, they are funded mostly by deposits rather than wholesale funding, they have international business and I sincerely doubt that the Reserve bank would recommend a bail-in (for these banks)”

The rand weakened 0.4 percent against the dollar, its losses picking up after data showed consumer inflation slowing to 6.3 percent year-on-year in July, below market expectations and casting doubt on the likelihood of a rate cut next month.

Investors are increasingly nervous about the lengthening list of problems in South Africa, including weak growth, inflation, high household debt, in addition to the bank bailout and chronic labour unrest.

The cost of insuring the country's debt remained unchanged from a day earlier, however, with 5-year credit default swaps at 177 basis points, according to financial data provider Markit.

Russian shares slipped after gains of about 10 percent in the past two weeks while the rouble slipped 0.3 percent versus the dollar.

Ukraine's President Petro Poroshenko and Russia's Vladimir Putin will meet in Minsk next week to discuss the confrontation, the latest diplomatic overture to resolve the conflict.

Norway's $885 billion sovereign wealth fund also appears to believe the economic fallout from the Ukraine crisis will be limited as it increased its exposure to Russia in the first half of the year.

Elsewhere, Argentine dollar bond yield spreads over US Treasuries are likely to widen in reaction to President Cristina Fernandez's late Tuesday announcement that she would aim to swap recently defaulted dollar bonds for new debt governed by Argentine law.

This would help skirt a US ruling that prevented the country paying its creditors.

Argentine spreads stand at 766 bps over Treasuries, having widened more than 100 bps since the end of July. - Reuters