Traders work on the floor of the New York Stock Exchange, June 29, 2023.
Brendan McDermid | Reuters
Global stock markets tumbled on Wednesday after ratings agency Fitch downgraded the United States’ long-term credit rating, but top economists say there is nothing to worry about.
Fitch announced late Tuesday that it had downgraded the rating of U.S. long-term foreign currency bonds from AAA to AA+, citing “expected fiscal deterioration over the next three years,” an erosion of governance in light of “repeated political impasses over limiting debts. and a generally growing debt burden.
US stock futures were sharply lower after the downgrade, indicating a drop of almost 300 points for US stock futures Dow Jones Industrial Average during the Wednesday opening on Wall Street.
The pan-European Stoxx 600 index fell 1.6% in mid-morning in London, with all sectors and major exchanges trading deep in the red, while Asia-Pacific shares also fell across the board overnight plummeted.
High-profile economists, including former US Treasury Secretary Larry Summers and Allianz chief economist Mohamed El-Erian, denounced the Fitch decision, with Summers calling it “bizarre and inept” and El-Erian “baffled” by the timing and reasoning. Current Treasury Secretary Janet Yellen called the rating downgrade “outdated.”
Goldman Sachs Chief Political Economist Alec Phillips was also quick to point out that the decision was not based on new budget information and therefore is not expected to have a lasting impact on market sentiment beyond the immediate shock selling on Wednesday.
Phillips said the downgrade “should have little immediate impact on financial markets as it is unlikely that there are any large government bond holders who would be forced to sell based on the change in rating.”
“Fitch’s projections are similar to ours – they imply a federal deficit of around 6% of GDP over the next few years – and Fitch cites CBO (collateralized bond) projections in its medium-term outlook, so the downgrade does not reflect new developments. information or a major disagreement on the budget outlook,” he said in a note on Tuesday.
Although this was the first downgrade of its kind since 1994, Fitch’s fellow rating agency S&P downgraded the US Treasury rating in 2011 and while this had a “meaningful negative impact” on market sentiment, Phillips noted that there was “no clear forced sale took place”. time.” The S&P500 The index recovered by 15% over the following twelve months.
“Because government bonds are such an important asset class, most investment mandates and regulatory regimes refer specifically to these bonds, rather than to AAA-rated government bonds,” he said, while also noting that Fitch has not adjusted its “country ceiling.” at AAA.
“Had Fitch also lowered the country ceiling, it could have negatively impacted other AAA-rated securities issued by U.S. entities,” Phillips added.
This view was echoed by Chris Harvey, head of equity strategy at Wells Fargo Securities, who said Fitch’s rating downgrade “should not have a comparable impact to S&P’s 2011 rating downgrade (SPX 1-day: -6 .7%), given the very different macro conditions and other reasons.
“Wells Fargo believes any pullback in the stock markets will be “relatively short and shallow.”
Harvey noted that before S&P’s 2011 downgrade, stocks were in correction territory, credit spreads widened, interest rates fell and the global financial crisis was “still in the market’s collective conscience” – while conditions today ‘are almost the opposite’. .”
Other triggers for consolidation
While the overriding macro message was one of looking beyond Tuesday’s downgrade, veteran investor Mark Mobius told CNBC on Wednesday that the move could cause investors to reconsider their strategies in the U.S. debt and currency markets.
“I think from a longer-term perspective, people are starting to think that they need to diversify their investments, first away from the US and also into equities, because that is a way to protect them against any deterioration in the currency – the US. dollar or any other currency,” Mobius, founder of Mobius Capital Partners, told CNBC’s “Squawk Box Europe.”
![Mark Mobius says investors will diversify from the US into equities after Fitch downgrade](https://image.cnbcfm.com/api/v1/image/107280438-1690964642408-1690964215-30581227028-hd.jpg?v=1690965413&w=750&h=422&vtcrop=y)
While he still expects U.S. stock markets to continue rising along with global peers, he suggested U.S. allocations within investment portfolios could decline slightly and focus on international and emerging markets.
Virginie Maisonneuve, global CIO of equities at Allianz Global Investors, told CNBC on Wednesday that the market should look at other potential triggers for a longer recession.
![In addition to the reduction of the US national debt, there are also consolidation triggers, says CIO of Allianz](https://image.cnbcfm.com/api/v1/image/107280422-16909633201690963317-30581072586-1080pnbcnews.jpg?v=1690964192&w=750&h=422&vtcrop=y)
“Markets clearly need to pay attention, but we need to remember that it is still investment grade and reflects the past,” she said on the Fitch call.
“There are other potential triggers for consolidation. We have to remember that we’ve had very strong markets, we’ve had macro spikes – so we have an inflation spike, we have a slowdown, but we still have core inflation.”
She noted that core inflation in Europe has proven more persistent than expected, while wheat and grain prices continue to react to developments in Ukraine and could further fuel food inflation.