Global equities dropped as Fitch Ratings’ downgrade of US government debt spurred a retreat from riskier assets.
(Bloomberg) — Global equities dropped as Fitch Ratings’ downgrade of US government debt spurred a retreat from riskier assets.
The weakness moderated during the session, as a growing number of strategists and fund managers said they expected the rating cut to have a limited impact. Treasuries posted small declines, largely in keeping with Treasury Secretary Janet Yellen’s assertion that they remain “the world’s preeminent safe and liquid asset.”
Nasdaq 100 futures were 0.9% lower, after falling as much as 1.4% earlier, still signaling a pullback later Wednesday for a market that has surged 44% in 2023. Broad losses in Europe dragged all industry groups in the benchmark regional index into the red. The Stoxx 600 index was down 1%, but well off its Wednesday lows.
Fitch stripped the US of its top-tier rating, criticizing the ballooning fiscal deficit and an “erosion of governance.” The downgrade serves up an extra dose of jeopardy for equity investors already concerned over the risks of recession and whether this year’s run-up in stocks is sustainable.
“One can have the feeling that the market is looking for excuses to take some profits,” said Alexandre Baradez, chief market analyst at IG Markets in Paris. “But rather than the Fitch downgrade, I suspect that what’s currently being priced is the growing risk of an economic slowdown. The downward trend started to emerge yesterday on the back of disappointing Chinese and US data, which suggests it’s not really about the rating downgrade, but rather the risk of a slowdown.”
Investors said the downgrade to AA+ from AAA shouldn’t harm the top-notch status of US assets over the longer-term, citing a lack of alternatives and the American economy’s resilience. A similar event in 2011, when S&P Global Ratings removed the highest rating for the US following an earlier debt-ceiling crisis, also offers a useful guide. While that triggered a selloff in risk assets, it boosted Treasuries as investors sought havens.
“Many major Treasury holders, such as funds and index trackers, will likely have already prepared for the move to avoid having to force-sell their existing holdings,” said Mark Haefele, chief investment officer at UBS Global Wealth. “Safe haven demand amid the downgrade jitters could also counterintuitively support Treasuries in the short term.”
Treasury yields ticked higher, while a gauge of dollar strength climbed by about 0.2%. The US Treasury on Wednesday boosted the size of its quarterly sale of longer-term debt for the first time in over 2 1/2 years, in a move that will test dealers’ appetites amid an increase in government borrowing needs.
S&P 500 futures were about 0.6% lower. The last time the US sovereign credit rating was downgraded, the index plunged 6.7% with all stocks in the red for the first time since at least 1996. The benchmark eventually erased those losses five trading days later and is up 282% since.
In individual stock moves, Ferrari NV fell after the Italian supercar maker issued disappointing guidance. Siemens Healthineers AG fell after the German medical technology company missed estimates. Hugo Boss AG dropped after the fashion retailer’s margin fell short of expectations and inventories rose.
Advanced Micro Devices Inc. gained in premarket US trading after the company topped second-quarter estimates and said it was making further inroads in artificial-intelligence computing. Starbucks Corp. dropped as its quarterly sales fell short of analysts’ estimates, a sign that momentum may be slowing for the coffee giant amid higher prices and tighter pocketbooks. Pinterest Inc. slid after the social networking company failed to meet heightened expectations.
Apple Inc. and Amazon.com Inc. are among companies scheduled to report this week, with investors on the lookout for clues on how high interest rates are affecting the economy.
Markets showed muted immediate reaction to ADP Research Institute data showing US companies added more jobs in July than expected. Private payrolls increased by 324,000 last month, exceeding all estimates in a Bloomberg survey of economists. The reading follows figures on Tuesday suggesting some softening in demand for workers in a still-tight labor market, and precedes Friday’s all-important jobs report.
Elsewhere, oil extended its rally, with West Texas Intermediate up 0.7%, after an industry estimate pointed to a huge drawdown in US inventories, adding to signals the market is tightening.
Key events this week:
- China Caixin Services PMI, Thursday
- Eurozone S&P Global Eurozone Services PMI, PPI, Thursday
- Bank of England rate decision, Thursday
- US initial jobless claims, productivity, factory orders, ISM Services, Thursday
- Eurozone retail sales, Friday
- US unemployment rate, non-farm payrolls, Friday
Some of the main moves in markets:
Stocks
- S&P 500 futures fell 0.6% as of 8:37 a.m. New York time
- Nasdaq 100 futures fell 0.9%
- Futures on the Dow Jones Industrial Average fell 0.4%
- The Stoxx Europe 600 fell 1%
- The MSCI World index fell 0.5%
Currencies
- The Bloomberg Dollar Spot Index rose 0.2%
- The euro fell 0.2% to $1.0963
- The British pound fell 0.3% to $1.2733
- The Japanese yen rose 0.2% to 143.09 per dollar
Cryptocurrencies
- Bitcoin rose 1% to $29,501.63
- Ether rose 0.3% to $1,855.35
Bonds
- The yield on 10-year Treasuries advanced four basis points to 4.06%
- Germany’s 10-year yield declined four basis points to 2.51%
- Britain’s 10-year yield was little changed at 4.40%
Commodities
- West Texas Intermediate crude rose 0.8% to $82.02 a barrel
- Gold futures rose 0.2% to $1,983.20 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Tassia Sipahutar, Michael Msika and Julien Ponthus.
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