Fitch downgrades U.S. foreign currency ratings from ‘AAA’ to ‘AA+’.
Fitch downgrades U.S. foreign currency ratings from 'AAA' to 'AA+'.
The US Debt Downgrade: A Shot Across the Bow
Image Source: Reuters
On August 1, ratings agency Fitch made the surprising move to downgrade the United States’ long-term foreign currency ratings from AAA to AA+. This decision reflects a growing concern about expected fiscal deterioration and a high national debt burden. Despite a bipartisan agreement reached in June to suspend the debt ceiling until January 2025, Fitch claims to have witnessed a steady deterioration in governance over the past two decades, particularly in fiscal and debt matters. This downgrade has immediate repercussions, resulting in a decline in the value of the US dollar against major currencies.
The reaction in the market was not entirely unexpected, with the S&P 500 futures down 0.3%. However, the overall impact remains to be seen as experts weigh in on the situation.
Surprising Timing and Puzzling Motivations
Wendy Edelberg, Director of the Hamilton Project at the Brookings Institution in Washington D.C., expressed her surprise at the timing of the downgrade. She questions whether Fitch had access to new information that they did not have during the debt ceiling crisis. Edelberg highlights the positive fiscal outlook and believes that unless there is a risk of default, the motivation for the downgrade is unclear. She suggests that a potential second downgrade, if it were to happen, would have a greater impact before the debt ceiling deal was reached. She emphasizes that assessing the long-term impact will require more time.
- Lumen Technologies shares drop after reporting a loss of almost $9 ...
- Fitch downgrades US credit rating from AAA to AA+.
- Fitch downgrades U.S. credit rating from ‘AAA’.
Meanwhile, Jason Ware, Chief Investment Officer at Albion Financial Group in Salt Lake City, Utah, reflects on the expected nature of the downgrade. He notes that Fitch had previously placed the US on negative watch, making the downgrade less surprising. Additionally, Ware draws a parallel to a similar downgrade by S&P in 2011, which did not have a long-lasting negative impact on the market. He believes that investors with a long-term investment strategy are unlikely to sell stocks solely due to the Fitch downgrade.
Signs in the Bond Market and Investor Sentiment
Michael O’Rourke, Chief Market Strategist at JonesTrading in Stamford, Connecticut, mentions that the bond market activity prior to the announcement acted as if someone knew about the downgrade. He acknowledges the surprise of the decision and cautions that it could have significant implications, recalling the aftermath of the S&P downgrade in 2011. O’Rourke highlights the potential sensitivity of the market to such a curveball.
Contrary to concerns about investor appetite for government debt, Bernard Baumohl, Managing Director and Chief Global Economist at The Economic Outlook Group in Princeton, New Jersey, believes that the downgrade will not significantly impact investors’ interest in US bonds. He refers to the similar response seen after the S&P downgrade, where demand for US bonds remained strong.
Adding a slightly different perspective, Michael K. Farr, CEO and Founder of Farr, Miller & Washington LLC in Washington, DC, hopes that the downgrade serves as a wake-up call. He cautions against complacency towards debt and stresses the need to address the issue of spending more than the country earns. He believes that the market’s current indifference to the downgrade should not dismiss its significance and urges everyone to take it seriously.
Market Impact and Uncertain Outlook
Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services in Atlanta, points out the unexpected nature of the downgrade and its potential impact on the market. Given the recent significant moves in both the equity and bond markets, Lerner highlights the market’s vulnerability to bad news. He refers to the critical level the 10-year Treasury yield is approaching and the five straight months of gains in the equity market. For him, the Fitch downgrade represents a crucial test for both.
Eric Winograd, Chief Economist at AllianceBernstein in New York, believes that the downgrade is not a significant signal of trouble ahead. He believes that demand for both long-term and short-term Treasuries will persist, as no one genuinely expects the US to default on its debt payments. Winograd sees Fitch’s decision more as a cautionary measure than a dire warning.
Finally, Quincy Crosby, Chief Market Strategist at LPL Financial in Charlotte, North Carolina, interprets Fitch’s downgrade as a warning based on the assumption that a growing deficit weakens a nation’s currency. However, she points out the irony that the US dollar has often strengthened despite the expanding deficit. Nonetheless, Fitch suggests that the dollar will eventually become a casualty as fiscal matters worsen, which warrants attention.
Lessons from the Past and Future Outlook
Jack Ablin, Chief Investment Officer at Cresset Wealth Advisors in Palm Beach, Florida, expresses his surprise at the downgrade while acknowledging the systemic problem of troubled negotiations surrounding the US debt ceiling. He emphasizes the need to move beyond the constant brinkmanship and find a more stable approach to budget negotiations.
Angelo Kourkafas, Senior Investment Strategist at Edward Jones in St. Louis, finds the timing of the downgrade unexpected, which raises the question of a potential market pullback. However, he highlights the difference in the current market backdrop compared to the 2011 downgrade when the economy was recovering from the financial crisis.
In conclusion, the Fitch downgrade of the US long-term foreign currency ratings has caught many by surprise. While some experts view it as a warning sign about the country’s fiscal trajectory and debt burden, others emphasize the market’s ability to absorb and adjust to such news. The impact on investor sentiment, bond yields, and the US dollar remains uncertain. However, it is evident that the underlying issues of governance and fiscal responsibility need to be addressed for long-term stability. The downgrade serves as a reminder for the US to confront its fiscal challenges and find sustainable solutions, rather than relying on temporary measures that may only postpone the inevitable.
/cloudfront-us-east-2.images.arcpublishing.com/reuters/COSK6NPXOBPM5FG64ES6FC7SCE.jpg){kind=link}