Traders work on the floor of the New York Stock Exchange, June 29, 2023.

Brendan McDermid | reuters

Global stock markets fell on Wednesday after the rating agency’s decision Fitch downgrades United States long-term credit rating But top economists say there is nothing to worry about.

Fitch announced late on Tuesday that it had downgraded US long-term foreign currency issuer default ratings, citing “expected fiscal slippages over the next three years” in light of “repeatedly stressed financial conditions”. has been downgraded from AAA to AA+. debt ceiling political impasse“And the debt burden is generally increasing.

us stock futures Sharply lower after the downgrade, indicating a downside risk of around 300 points Dow Jones Industrial Average Open on Wall Street on Wednesday.

The pan-European Stoxx 600 index fell 1.6%. By mid-morning in London, all sectors and major stock markets were trading in the red. Shares in Asia-Pacific also declined Across the board overnight.

High-profile economists, including former US Treasury Secretary Larry Summers and Allianz Chief Economic Advisor Mohamed El-Arian, criticized Fitch’s decision, with Summers calling it “bizarre and inept” and El-Arian “shocked” by the timing and logic. Said. Current Treasury Secretary Janet Yellen described the downgrade as “outdated”.

Goldman Sachs Chief political economist Alec Phillips was also quick to say that the decision is not dependent on new fiscal information and therefore is not expected to have a lasting impact on market sentiment beyond the immediate selloff on Wednesday.

Phillips said the downgrade “should have little direct impact on financial markets as it is unlikely that there are major holders of Treasury securities that would be forced to sell based on the rating change.”

“Fitch’s projections are the same as ours – they indicate a federal deficit of about 6% of GDP over the next few years – and Fitch cites CBO (collateralized bond obligation) projections in its medium-term outlook, so The downgrade does not reflect new “large differences in information or opinion regarding the fiscal outlook,” he said in a note on Tuesday.

Although it was the first downgrade of its kind since 1994, Fitch’s fellow rating agency S&P downgraded the US sovereign rating in 2011, and although this had a “meaningful negative impact” on market sentiment, Phillips said. that “there was no apparent forced sale” at the time. S&P 500 The index increased by 15% over the next 12 months.

“Because Treasury securities are an important asset class, most investment mandates and regulatory regimes refer specifically to them, rather than AAA-rated government debt,” he said, adding that Fitch has also adjusted its “country range.” What has not been done is what remains. on AAA.

“If Fitch were to lower the country limit as well, it could have a negative impact on other AAA-rated securities issued by US entities,” Phillips said.

This view was echoed by Chris Harvey, head of equity strategy at Wells Fargo Securities, who said that the Fitch downgrade “shouldn’t have the same impact as S&P’s 2011 downgrade (SPX 1-day: -6.7%), which was a completely different macro environment.” See and for other reasons.

Wells Fargo believes that any decline in the stock will be “relatively small and shallow.”

Harvey noted that, prior to the 2011 S&P downgrade, stocks were in correction territory, credit spreads were rising, rates were falling, and the global financial crisis was “still in the collective consciousness of the market” – whereas today the conditions are “almost the opposite”. Are .”

Other triggers for consolidation

Although the prevailing macro message was one of looking beyond Tuesday’s decline, veteran investor Mark Mobius told CNBC on Wednesday that the move could cause investors to reconsider their strategies on the US debt and currency markets.

“I think from a longer term perspective people will start thinking that they have to diversify their holdings, firstly away from the US and also into equities as it is a way of protecting them from any fall in the currency – u dollar or any other currency for that matter,” Mobius, founding partner at Mobius Capital Partners, told CNBC’s “Squawk Box Europe.”

Mark Mobius says investors will diversify away from US equities after Fitch downgrade

While he still expects the US stock market to continue rising along with global competitors, he suggested that the allocation of states within investment portfolios could be reduced slightly and redirected towards international and emerging markets.

Meanwhile, Virginia Maisonneuve, global CIO of equities at Allianz Global Investors, told CNBC on Wednesday that markets should look to other potential triggers for a prolonged downturn.

Consolidation triggers besides US debt grade downgrades, says Allianz CIO

Regarding the Fitch call, he said, “The market obviously has to pay attention, but we have to remember that this is still investment grade and it is reflecting the past.”

“There are other potential triggers for consolidation. We have to remember that we have had very strong markets, we have had macro peaks – so we have had inflation peaking, our growth is slowing down, but we still have core inflation. “

He said core inflation in Europe has proved more stable than expected, while wheat and grain prices continue to react to developments in Ukraine and could push up food inflation further.


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