ADVERTISEMENTAfter a weekly surge on Wall Street due to eased tensions in the US-China trade war, global markets experienced a risk-off sentiment following Moody’s downgrading of US credit ratings. During Monday’s Asian trading session, global equity indices plummeted as selling in US assets resumed, causing US stock futures, the dollar, and government bonds to decline.
Moody’s Downgrades US Credit Ratings
last Friday, Moody’s Ratings, a top American credit rating agency, lowered the “US long-term issuer and senior unsecured ratings” from the top-tier Aaa to Aa1, raising concerns about increasing government debt and expanding fiscal deficits.
The agency commented, “Over more than a decade, US federal debt has surged due to ongoing fiscal deficits. During that period, federal spending has risen as income tax cuts have decreased government revenues. As deficits and debt have expanded, and interest rates have hiked, interest payments on government debt have increased significantly.”
Moody’s move followed similar actions by its competitors: Standard Amp; Poor’s lowered its US sovereign credit rating to AA+ in 2011, and Fitch Ratings made the same cut in 2023.
The decision caused an increase in US government bond yields because investors demanded a higher premium to compensate for perceived risks. On Friday, the 10-year Treasury yield rose by 5 basis points to 4.48% and further increased to 4.51% during Monday’s Asian session. The downgrade also seemed to lower investors’ interest in other US assets, including equities and the dollar.
Moody’s expects the flexibility of the federal budget to remain “limited” unless there are changes in taxation and government spending. The agency projects that extending the 2017 Tax Cuts and Jobs Act would expand the US deficit by approximately $4 trillion over the next decade. “Federal interest payments are expected to consume around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021,” Moody’s added.
“It does speak to a degree of market risk in US debt, implying that the value of US bonds could be compromised if the economy can no longer sustain growth rates necessary to service the government’s liabilities,” noted Kyle Rodda, a senior market analyst at Capital.com in Australia.
Risk-Off Sentiment Dominates
US equity futures dropped sharply during Monday’s Asian session following Moody’s downgrade. As of 4:42 am CEST, futures on the Dow Jones Industrial Average fell 0.65%, the S&P 500 dropped 0.92%, and the Nasdaq Composite declined 1.22%. Asian equities also faced pressure amid a risk-off atmosphere. Japan’s Nikkei 225 fell 0.66%, Australia’s ASX 200 declined 0.46%, and Hong Kong’s Hang Seng Index slid 0.56% during the same period.
The effect is expected to affect European markets, but major indices such as the Euro Stoxx 600 and the DAX were expected to open flat.
The US dollar weakened against other G10 currencies, particularly safe-haven ones such as the euro, the Japanese yen, and the Swiss franc. Gold prices rose due to increased safe-haven demand, though they retreated from an intraday high, possibly due to increasing US bond yields. Gold futures initially surged over 1% before retreating and were 0.8% higher, trading at $3,213 per ounce as of 4:12 am CEST.
Despite market jitters, Rodda believes the impact of Moody’s move will be short-lived. “I don’t think it will have a lasting impact,” he said, even though he views the downgrade “as a reminder of the very loose fiscal policy the US is operating under and the structural problems related to US public finance.”
