Asia stocks fell as Fitch Ratings’ downgrade of the US sovereign rating sapped risk sentiment following a strong recent run, while boosting demand for haven assets.
The rating cut, announced before markets opened in Asia, initially pushed Treasuries higher before the moves stabilized, leaving the two-year yield down 1 basis point. The yen and the Swiss franc advanced against the dollar.
Japanese stocks led declines in the region as a stronger yen dented the outlook for corporate profit. South Korean and Australian stocks also fell, while equities in Hong Kong and mainland China wavered. Some profit taking may be taking place after a broad uptrend in Asian equities following China’s Politburo meeting.
“Think it’s just a catalyst for Asia traders to book profits,” said Joshua Crabb, head of Asia Pacific equities at Robeco Hong Kong Ltd., said on the declines in equities. “The market had a really good run in recent sessions. It’s just looking for something to get worried about.”
Investors say Fitch’s US downgrade to AA+ from AAA will do little to deter the top-notch status of US assets over the longer-term, citing a lack of alternatives and the economy’s solid growth. They are also taking cues from what transpired in the wake of a similar event in 2011, when S&P Global Ratings removed the highest rating for the US following an earlier debt-ceiling crisis. While that triggered a selloff in risk assets around the world, it boosted Treasuries as investors sought out havens.
Read: US Stripped of Top Rating by Fitch in Echo of 2011 Move by S&P
“There’s a few things that do surprise us a little bit in terms of their estimates,” Chris Weston, head of research at Pepperstone Group Ltd., said on the US’s deficit estimates by Fitch on Bloomberg Television. “The absolute downgrade itself won’t and it certainly isn’t going to be something that anyone’s going to liquidate their Treasury holdings on either.”
Contracts for the S&P 500 and Nasdaq 100 were down 0.2% and 0.3%, respectively, after the S&P 500 finished Tuesday with a small loss as the rally that drove the stock market up almost 30% from its October lows took a breather.
The dollar weakened against most of its Group-of-10 peers. A decline in the Bloomberg dollar index was modest, at less than 0.1%. Several strategists see the current weakness as temporary.
“The USD may ease further in coming sessions if markets consider the rating cut will undermine the USD’s reserve currency status and markets sell their US Treasury bond holdings,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia in Sydney. “But I don’t expect the USD will sustain any losses. Credit ratings are not typically a major medium term driver of currencies.”
Mixed Earnings
The latest US data suggested some softening in demand for workers in a still tight US labor market. The numbers weren’t enough to entice investors, who also grappled with a mixed bag of corporate earnings.
Oppenheimer Asset Management’s John Stoltzfus lifted his target on the S&P 500 index, a day after Morgan Stanley’s Michael Wilson, one of the market’s leading doomsayers, sounded less bearish than usual.
Stoltzfus now sees the S&P 500 index hitting 4,900 by the end of the year, leaving room for another 7% gain. The target would mark a new record for the gauge, and one that plays out against bearish predictions by prominent Wall Street names such as Wilson, JPMorgan’s Marko Kolanovic and Bank of America Corp.’s Michael Hartnett.
Elsewhere, oil extended its rally after an industry estimate pointed to a huge drawdown in US inventories, adding to signals the market is tightening. Gold edged higher.
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
- S&P 500 futures fell 0.2% as of 10:36 a.m. Tokyo time. The S&P 500 fell 0.3%
- Nasdaq 100 futures fell 0.2%. The Nasdaq 100 fell 0.3%
- Japan’s Topix index fell 0.5%
- Hong Kong’s Hang Seng Index fell 0.6%
- China’s Shanghai Composite Index fell 0.4%
- Australia’s S&P/ASX 200 Index fell 0.7%
Currencies
- The Bloomberg Dollar Spot Index fell 0.1%
- The euro rose 0.2% to $1.1001
- The Japanese yen rose 0.2% to 143.00 per dollar
- The offshore yuan was little changed at 7.1786 per dollar
- The Australian dollar was little changed at $0.6619
Cryptocurrencies
- Bitcoin rose 2.5% to $29,939
- Ether rose 1.3% to $1,874.35
Bonds
- The yield on 10-year Treasuries was little changed at 4.02%
- Japan’s 10-year yield advanced 0.5 basis point to 0.600%
- Australia’s 10-year yield advanced four basis points to 4.01%
Commodities
- West Texas Intermediate crude rose 1.2% to $82.32 a barrel
- Spot gold rose 0.3% to $1,949.17 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Rita Nazareth, Matthew Burgess, Brett Miller and Ishika Mookerjee.
