Stocks slump following Fitch's US downgrade

Global stocks dropped as Fitch Ratings’ downgrade of the US sovereign credit grade spurred a rapid retreat from riskier assets.

Broad losses in Europe dragged the benchmark regional index down by the most in almost four weeks. S&P 500 and Nasdaq 100 futures slid more than 1%, signaling a sharp drop on Wall Street following five months of gains for US stocks.

Fitch stripped the US of its top-tier rating, criticizing the ballooning fiscal deficit and an “erosion of governance.” The downgrade serves up an extra dose of jeopardy for equity investors already concerned over the risks of recession and whether this year’s run-up in stock markets is sustainable. 

“One can have the feeling that the market is looking for excuses to take some profits,” said Alexandre Baradez, chief market analyst at IG Markets in Paris. “But rather than the Fitch downgrade, I suspect that what’s currently being priced is the growing risk of an economic slowdown. The downward trend started to emerge yesterday on the back of disappointing Chinese and US data, which suggests it’s not really about the rating downgrade, but rather the risk of a slowdown.”

Reaction to the Fitch news was calmer in Treasuries and the dollar. Yields were steady, while a gauge of greenback strength was little changed. 

Investors said the downgrade to AA+ from AAA shouldn’t harm the top-notch status of US assets over the longer-term, citing a lack of alternatives and the economy’s solid growth. A similar event in 2011, when S&P Global Ratings removed the highest rating for the US following an earlier debt-ceiling crisis, also offers a useful guide. While that triggered a selloff in risk assets, it boosted Treasuries as investors sought havens.  

“The latest downgrade does not reflect any new fiscal information and should only have a limited market impact,” said Mark Haefele, chief investment officer at UBS Global Wealth. “Many major Treasury holders, such as funds and index trackers, will likely have already prepared for the move to avoid having to force-sell their existing holdings. Safe haven demand amid the downgrade jitters could also counterintuitively support Treasuries in the short term.”

In Asia, stocks headed for the biggest decline in more than four months as technology names dropped. Japanese stocks dropped the most this year as gains in the yen dented the outlook for corporate profit. 

In individual stock moves, Siemens Healthineers AG fell after the German medical technology company missed estimates. Hugo Boss AG dropped after the fashion retailer’s margin fell short of expectations and inventories rose.

Advanced Micro Devices Inc. gained in premarket US trading after the company topped second-quarter estimates and said it was making further inroads in artificial-intelligence computing. Starbucks Corp. dropped as its quarterly sales fell short of analysts’ estimates, a sign that momentum may be slowing for the coffee giant amid higher prices and tighter pocketbooks.

Apple Inc. and Amazon.com Inc. are among companies scheduled to report this week, with investors on the lookout for clues on how high interest rates are affecting the economy.

“People care a lot more about what the management guidance is for the second half of this year and maybe into next fiscal year,” Helen Zhu, chief investment officer at Nan Fung Trinity, said on Bloomberg Television. “Any kind of signs of better days ahead, that’ll get the market a lot more excited versus just what the backward looking numbers look like.”

Elsewhere, oil extended its rally after an industry estimate pointed to a huge drawdown in US inventories, adding to signals the market is tightening. 

Key events this week:

• China Caixin Services PMI, Thursday
• Eurozone S&P Global Eurozone Services PMI, PPI, Thursday
• Bank of England rate decision, Thursday
• US initial jobless claims, productivity, factory orders, ISM Services, Thursday
• Eurozone retail sales, Friday
• US unemployment rate, non-farm payrolls, Friday

Some of the main moves in markets:

STOCKS

• The Stoxx Europe 600 fell 1.7% as of 9:48 a.m. London time
• S&P 500 futures fell 1%
• Nasdaq 100 futures fell 1.3%
• Futures on the Dow Jones Industrial Average fell 0.8%
• The MSCI Asia Pacific Index fell 1.7%
• The MSCI Emerging Markets Index fell 1.9%

CURRENCIES

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0983
• The Japanese yen rose 0.7% to 142.36 per dollar
• The offshore yuan was little changed at 7.1915 per dollar
• The British pound was little changed at $1.2789

CRYPTOCURRENCIES

• Bitcoin rose 0.9% to $29,480.75
• Ether rose 0.3% to $1,855.42

BONDS

• The yield on 10-year Treasuries was little changed at 4.02%
• Germany’s 10-year yield declined three basis points to 2.52%
• Britain’s 10-year yield advanced two basis points to 4.42%

COMMODITIES

• Brent crude rose 0.6% to $85.39 a barrel
• Spot gold rose 0.3% to $1,950.69 an ounce

This story was produced with the assistance of Bloomberg Automation.