Stocks slip after Fitch downgrades US debt

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European and Asian stocks slid on Wednesday as investors responded to Fitch Ratings’ unexpected decision to downgrade the US’s top-tier sovereign debt.

The region-wide Stoxx Europe 600 index opened 0.9 per cent lower, extending losses from the previous session, while France’s Cac 40 gave up 1.2 per cent and Germany’s Dax lost 1.1 per cent.

The moves echoed sharp declines in Asia. China’s benchmark CSI 300 index fell 0.7 per cent, while Hong Kong’s Hang Seng index dropped 2.3 per cent, Japan’s Topix shed 1.5 per cent and South Korea’s Kospi lost 1.9 per cent.

Futures contracts tracking the US S&P 500 fell 0.6 per cent, following a small decline on Wall Street on Tuesday, while those tracking the tech-focused Nasdaq 100 were down 0.9 per cent ahead of the New York open.

The declines came after Fitch cut the US credit rating from triple A to double A plus after markets closed on Tuesday, citing a mounting government debt burden and the debt ceiling stand-off that brought the world’s largest economy close to a default two months ago.

While the downgrade soured overall sentiment towards risky assets such as stocks, there was little direct reaction in US assets apart from a shortlived dip in the dollar following the announcement.

US government debt gained slightly on Wednesday, with yields on two-year Treasuries falling 0.04 percentage points to 4.9 per cent, while yields on the benchmark 10-year notes declined 0.02 percentage points to 4.03 per cent. Yields fall as prices rise.

The US dollar slipped 0.1 per cent against a basket of six other currencies, while gold rose 0.3 per cent to $1,949.49 a troy ounce, as investors turned to safe-haven assets.

Treasury secretary Janet Yellen issued a statement saying the rating downgrade did “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”.

The US narrowly avoided a government default in June, with the federal borrowing limit lifted at the eleventh hour following months of tension over spending cuts.

Fitch is one of three rating agencies whose decisions are closely followed by market participants around the world. Moody’s still holds on to its triple A rating for the US, while S&P lowered its rating to double A plus in 2011 after a debt ceiling crisis that year.

Investors are looking ahead to Friday’s non-farm payrolls report for July to gain further insights into the health of the US economy more than a year after raging inflation prompted the Federal Reserve to start lifting interest rates.