US credit rating downgraded

Ratings agency Fitch’s recent decision to downgrade the US credit rating by one notch from AAA to AA+ has dimmed the outlook of the US economy and thrown the global stock markets into the red.

Fitch said the downgrade reflects the expected fiscal deterioration, a high and growing government debt burden and the erosion of governance in the world’s largest economy.

It was the second time in the past 12 years that that a leading credit agency has downgraded US debt. In 2011 Standard & Poor’s also downgraded the US’s triple-A rating to AA+ over a federal budget ceiling stalemate.

Fitch’s downgrade immediately drew an angry response from officials in the US administration, with Treasury Secretary Janet Yellen calling it “arbitrary”.

She said Fitch’s decision was based on outdated data and failed to reflect improvements in US governance indicators over the past two and a half years under President Joe Biden's administration.

Yellen added that the American economy is fundamentally strong and that the US has undergone a historically fast economic recovery from a deep recession, the unemployment rate is near historic lows, inflation has come down significantly, and the latest GDP report shows that the US economy continues to grow.

She emphasised that the American economy remains the world’s largest and most dynamic economy, with the deepest and most liquid financial markets in the world.

Following Fitch's decision to downgrade the US credit rating, global stocks simultaneously tumbled. On Wall Street, the Dow Jones Industrial Average fell 1%, while the S&P 500 lost 1.38% and the Nasdaq Composite dropped 2.17%.

European stocks fell to near two-week lows, with technology and auto stocks posting the biggest losses. STOXX Europe 600 fell 1.1% to its lowest level since July 20. The FTSE 100 Index fell 0.9%, while stock indexes in Frankfurt and Paris also dropped by 1.3-1.4%.

Asian stock markets also traded lower, with the Hong Kong stock market falling sharply after more than a week of gains, with technology giants being the hardest hit.

Hong Kong's Hang Seng Index dropped by a sharp 2.4% while the Shanghai Composite Index fell 0.9%. At opening on August 3, the Nikkei-225 Index in Tokyo lost 1.39% while the Topix Index lost 1.21%. The stock exchanges of Singapore, Mumbai, Seoul, Sydney, Taipei, Manila, Bangkok, and Jakarta were also in the red.

LPL’s Quincy Krosby called the downgrade a rationale for investors to sell off as well as to be more cautious in their trading. The fear of risks also makes investors shift to safer assets such as treasury bonds or the Japanese yen. The market is waiting for the US government to release official employment data, scheduled for August 4, to have appropriate responses.

In general, given the market has maintained a steady uptrend recently and the belief that that the US Federal Reserve will soon end the cycle of interest rate hikes and monetary tightening, experts are still optimistic that this “headwind” is only temporary before investors return to the trend of venture capital.

NDO