Global stock markets fell Wednesday after ratings agency Fitch downgraded its US credit rating, citing “a steady deterioration in standards of governance” and the American government’s growing debt burden.
Japan’s benchmark Nikkei 225 (N225) index had its worst day of the year, ending down 2.3%, while Hong Kong’s Hang Seng (HSI) Index closed down 2.5%, after Fitch cut its rating on US debt to AA+ from AAA on Tuesday.
European stocks fared a little better but the region’s benchmark Stoxx 600 index fell 1.4% by 5.57 a.m. ET to its lowest level in two weeks. Germany’s DAX (DAX) dropped 1.4% and France’s CAC (CAC40) 40 fell 1.2%, while London’s FTSE 100 (UKX) also hit a two-week low, down 1.5%.
US stock futures slipped. The S&P 500 index was down 0.8% and the Nasdaq down 1.2% in pre-market. But US Treasuries prices ticked higher, shaving a couple of points off the 10-year yield to 4.03%.
The credit rating downgrade comes after US lawmakers negotiated up until the last minute on a debt ceiling deal earlier this year, risking the nation’s first default. In a meeting with Biden administration officials, representatives from Fitch also repeatedly highlighted the January 6th insurrection as a significant concern as it relates to US governance, a person familiar with the matter told CNN.
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions,” Fitch said in a statement.
The agency expects America’s general government deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022.
“The last-minute saves performed by Washington aren’t the kind of actions held in high esteem by rating agencies, but the lack of movement in US Treasury bonds … suggests the market has already largely quantified and assessed the damage done,” Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said in a note.
China and Japan are the largest foreign investors in American government debt. Together they own $2 trillion, which is more than a quarter of the $7.6 trillion in US Treasury securities held by foreign countries.
Nonetheless, Goldman Sachs analysts said on Wednesday that they don’t believe there are any meaningful holders of Treasury securities who will be forced to sell due to a downgrade.
“S&P downgraded the sovereign rating in 2011 and while it had a meaningfully negative impact on sentiment, there was no apparent forced selling at that time,” they said in a research note.
“Because Treasury securities are such an important asset class, most investment mandates and regulatory regimes refer to them specifically, rather than AAA-rated government debt,” the Goldman Sachs analysts said.
