Wall Street is poised for a turbulent day after ratings agency Fitch’s shocking downgrade of the US’ top-tier sovereign credit, which roiled world markets Wednesday..
Fitch cut the US from AAA to AA+ after the market closed Tuesday, citing the nation’s ballooning debt load and political dysfunction in Washington.
Dow futures were down nearly 1% Wednesday, putting the index’s three-week streak in jeopardy. Futures for the S&P 500 slid by 21 points, or 0.46%, while futures for the tech-heavy NASDAQ tumbled 112 points, or 0.71%.
Global indexes were also sharply lower after Fitch’s downgrade.
Japan’s benchmark Nikkei 225 index had its worst day of the year on Wednesday, while Hong Kong’s Hang Seng Index slipped 2.5% in its final hour.
Mainland Chinese markets also fell: the Shanghai Composite closed 0.89% down, and the Shenzhen Component also lost 0.35% by the time the market closed.
Stocks fared slightly better in Europe. The pan-European Stoxx 600 fell 0.82%, to $463.35.
France’s major index, CAC 40, was also trending negatively, down 0.47%, to $7,372.35.
The downgrade “basically tells you the US government’s spending is a problem. It’s an unsustainable budget situation because the economy can’t even grow its way out of this problem going forward,” said Steven Ricchiuto, US chief economist at Mizuho Securities.
“Therefore, they’re going to have to either tackle it or accept the consequences of potential further additional downgrades.”
Tony Sycamore, an analyst with IG, said that apart from the Fitch move, there had been some disappointing data in the U.S. and China and some weaker-than-expected earnings, so people were taking money off the table.
Fitch’s downgrade came two months after President Biden and the Republican-controlled House reached a debt ceiling agreement after months of political brinkmanship. The deal lifted the government’s $31.4 trillion debt ceiling.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.
The move, which came after Fitch had placed the ratings on negative watch in May, drew an angry response from the White House, calling it “arbitrary and based on outdated data” as it came two months after a debt ceiling agreement that averted a US default.
“Fitch’s decision does not change what Americans, investors and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong,” Treasury Secretary Janet Yellen said.
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets.
It’s the first time the US has had its AAA rating cut since 2011, when cStandard & Poor’s cut it one notch to AA-plus following another debt ceiling battle.
Aside from political battles in Washington, Fitch pointed to the rising general government deficit, which it anticipated will rise to 6.3% of gross domestic product in 2023, from 3.7% in 2022, for its decision.
The agency also noted that it expects the US economy to slip into a mild recession from the fourth quarter of this year into the first quarter of 2024.
“Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the US economy into a mild recession,” Fitch said in the statement.
The view contradicts the opinion offered by Fed staff last week after central bankers Federal Reserve hiked interest rates to a 22-year high..
Fed Chairman Jerome Powell that Fed staff is no longer forecasting a recession.
“We do have a shot” for inflation to return to target without high levels of job losses, Fed Chairman Jerome Powell said.
With Post wires