European stocks slumped the most in almost a month as Fitch Ratings’s downgrade of US sovereign debt triggered risk-off trades across the board, while earnings reports did little to offset the negative sentiment.
The Stoxx 600 Index was 1.2% down as of 3:07 p.m. in London, with all the subindexes and about 85% of its constituents trading in the red. It had earlier dropped as much as 1.8%.
The US was stripped of its top-tier sovereign credit grade by Fitch, which criticized the country’s ballooning fiscal deficits and an “erosion of governance” that’s led to repeated debt limit clashes over the past two decades.
“Fitch’s move is rather symbolic,” said Shanti Kelemen, chief investment officer at M&G Wealth Investments. “Hard to argue the rationale, but certainly surprising. Fitch has said it expects the US to slip into a mild recession later this year. We disagree, and believe US economic growth will remain solid.”
Read more: Downplaying Fitch Downgrade, Investors See Muted Stock Move
Among single stocks, Siemens Healthineers AG dropped after the German medical technology company missed estimates. Hugo Boss AG declined as the fashion retailer posted a miss on gross margin, even as it raised its guidance for 2023 after second-quarter results topped estimates.
Telefonica SA shares dropped as much as 7.7% after 1&1, the carrier’s wholesale partner in Germany, announced a switch to Vodafone’s network in areas that it won’t be building its own.
After Europe’s benchmark posted its third month of gains in four in July, this month has started on a negative note, following a trend in which August and September are usually the worst time for European stocks, based on the average performance of the Stoxx 600 over the past 25 years.
Here’s what market participants are saying about the US rating downgrade:
Richard Saldanha, a global equity fund manager at Aviva Investors:
“Whilst the Fitch US downgrade is notable we don’t think this will have a significant impact from an investment perspective – investors are much more focused right now on inflation (where we are seeing a gradual easing based on recent data) as well as confirmatory signals from the Fed that we are now near the peak of the hiking cycle. With signs that we may be getting closer to a soft landing scenario rather than an outright recession, as well as a fairly upbeat earnings season thus far, we think there are reasons to believe markets can sustain their recent gains.”
Mark Dowding, chief investment officer at RBC BlueBay Asset Management LLP:
“On the whole, we don’t see the Fitch downgrade to US as particularly significant. However, it serves as a reminder that there will be heavy ongoing issuance of Treasuries on a forward looking basis and this is something that can weigh on global markets if this prompts a steepening of the yield curve and a rise in the discount rate for longer dated cash flows. I would also note that over the past few weeks, investors have been buying into the Goldilocks theme in the US economy, causing entrenched bears to capitulate. However, inasmuch as the market starts to price for perfection, then it will become intrinsically more vulnerable to a correction.”
Andrew Bell, chief executive officer of Witan Investment Trust:
“This is a purely symbolic move, reflecting facts already known to the market and doesn’t alter the fact that US treasuries will continue to set the benchmark for liquid collateral readily convertible into cash. The US economy is growing better than expected and better than others, which improves its ability to continue to service its debts. Longer term, the rising amount of government debt will either tend to mean investors will need higher bond yields to persuade them to buy or the dollar will be less strong than in the past.”
Richard Flax, chief investment officer at European digital wealth manager Moneyfarm:
“There’s some short-term potential to cause to profit taking. Longer-term dynamics don’t change. The biggest drivers will still be broader issues around the impact of monetary policy on developed economies and whether we’ll see a soft landing or more macro weakness coming through. Does the downgrade act as a catalyst? Maybe a little but it won’t be the main driver over the long term.”
Alfonso Benito, chief investment officer at Dunas Capital:
“The US rating cut could be the first and we could see other countries being downgraded as high debt is a common issue for many, but for the US I don’t see this having a big effect on the economy.”
For more on equity markets:
- Luxury Sector Boom Running Up Against US Slowdown: Taking Stock
- M&A Watch Europe: BNP Mexico Sale, Investec, Unicaja, Dustin
- IPO Slump Worsens London’s Shrinking Stock Market: ECM Watch
- US Stock Futures Fall; SolarEdge, Paycom Software, Nevro Fall
- BP Jumps On Big Oil’s Buyback Train: The London Rush
You want more news on this market? Click here for a curated First Word channel of actionable news from Bloomberg and select sources. It can be customized to your preferences by clicking into Actions on the toolbar or hitting the HELP key for assistance. To subscribe to a daily list of European analyst rating changes, click here.
--With assistance from Michael Msika, Julien Ponthus and Lisa Pham.
Author: Macarena Muñoz and Sagarika Jaisinghani
