Asian stocks slide on US credit downgrade

Hong Kong — Asian stocks traded lower while US treasury yields declined on Wednesday after ratings agency Fitch unexpectedly downgraded the US’s top-tier sovereign credit rating.

MSCI’s broadest index of Asia-Pacific shares fell 0.5%. Japan’s Nikkei slid by 1.2%, while Australian shares edged down 0.5%.

China’s mainland benchmark and Hong Kong’s fell by 0.3% and 0.5%, respectively.

Asian stocks were also weighed by declines on Wall Street overnight. US stock futures, the S&P 500 e-minis, pointed 0.2% lower on Wednesday.

Fitch cut the US by one notch to AA+ from AAA, citing fiscal deterioration, a decision announced after the Wall Street close on Tuesday.

US 10-year treasury yields declined by about 2 basis points (bps) to 4.025% in Tokyo.

“Most of the Asia turmoil this morning and the treasury yields move is triggered by the Fitch decision,” said Manishi Raychaudhuri, head of Asia-Pacific equity research at BNP Paribas.

“It’s kind of a short-term knee-jerk reaction, so we will have to wait and watch for how this pans out.”

Investors counter-intuitively fled to the relative safety of sovereign debt from riskier equity markets. Treasuries, whose yields fall when prices rise, were also bought when S&P Global Ratings cut the US top “AAA” rating by one notch to “AA-plus” in 2011.

The US dollar moved lower against a basket of major currencies immediately after the announcement, but was up 0.1% as of the Asian morning.

While the investor reaction to the downgrade was relatively contained, it has injected some uncertainty into financial markets.

“This basically tells you the US government’s spending is a problem. It’s an unsustainable budget situation, because the economy can’t even grow its way out of this problem,” said Steven Ricchiuto, US chief economist, Mizuho Securities. “Therefore, they’re going to have to either tackle it or accept the consequences of potential further additional downgrades.”

Looking beyond the Fitch downgrade, the main area of focus will still be central banks, corporate earnings and, in China specifically, stimulus prospects, he said.

The US publishes fresh data on jobless claims and unemployment later this week.

Oil prices gained on Wednesday, trading near their highest since April, after industry data showed a much steeper-than-expected draw last week in US crude oil inventories.

West Texas Intermediate (WTI) crude futures ticked up 1% to $82.18, while Brent crude rose to $85.73 a barrel.

Gold was slightly higher, trading at $1,949.69 per ounce.

Reuters