Global Stock Markets Fall Following US Credit Rating Downgrade
Hong Kong/London – Global stock markets experienced a significant decline on Wednesday after ratings agency Fitch downgraded the credit rating of the United States. Fitch cited “a steady deterioration in standards of governance” and the growing debt burden of the American government as the reasons for the downgrade.
Japan’s benchmark Nikkei 225 index had its worst day of the year, ending down 2.3%. Hong Kong’s Hang Seng Index closed down 2.5% following Fitch’s downgrade of US debt from AAA to AA+.
European stocks fared slightly better, but the region’s benchmark Stoxx 600 index still fell 1.4% to its lowest level in two weeks. Germany’s DAX dropped 1.4%, France’s CAC 40 fell 1.2%, and London’s FTSE 100 hit a two-week low, down 1.5%.
In the United States, stock futures also slipped. The S&P 500 index was down 0.8%, and the Nasdaq fell 1.2% in pre-market trading. However, US Treasuries prices ticked higher, leading to a slight decrease in the 10-year yield to 4.03%.
The credit rating downgrade comes after intense negotiations on a debt ceiling deal earlier this year, which risked the nation’s first-ever default. Representatives from Fitch, in a meeting with Biden administration officials, also expressed concerns over the January 6th insurrection as it relates to US governance.
Fitch stated in a statement, “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.”
According to Fitch, America’s general government deficit is expected to rise to 6.3% of GDP in 2023, up from 3.7% in 2022.
Although the downgrade is concerning, Goldman Sachs analysts do not believe there will be any forced selling of Treasury securities due to the downgrade. They stated, “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.”
China and Japan are the two largest foreign investors in American government debt, owning a combined $2 trillion. However, the Goldman Sachs analysts explained that most investment mandates and regulatory regimes specifically refer to Treasury securities, rather than AAA-rated government debt.
The impact of Fitch’s downgrade on global stock markets remains to be seen, but market analysts are closely monitoring the situation for any potential future developments.
– Elisabeth Buchwald contributed to this article.