Global stock markets slump after US ratings downgrade

Global stock markets slumped Wednesday after Fitch stripped the United States of its top credit rating, citing a growing federal debt burden and an "erosion of governance."

Fitch's decision Tuesday night to downgrade the United States from AAA to AA+ sparked a fiery rebuttal from the Biden administration.

Treasury Secretary Janet Yellen characterized Fitch's move as "entirely unwarranted," calling it "puzzling in light of the economic strength we see in the United States."

Wall Street's main indices moved lower, with the S&P 500 finishing down 1.4 percent.

Europe's main markets closed with losses of more than one percent.

"Market participants were already contending with the nagging notion that the stock market was overbought on a short-term basis and due for a pullback," said market analyst Patrick O'Hare at Briefing.com.

"It didn't necessarily need another excuse to continue with a consolidation trade, yet Fitch Ratings provided one after Tuesday's close when it downgraded its US credit rating to AA+ from AAA."

Ratings downgrades often mean it becomes more expensive for a government to borrow, but the status of US government bonds, or Treasuries, as a highly liquid safe-haven asset actually saw their yield dip immediately after the announcement.

The yield on 10-year bonds later rose in trading on Wednesday, which traders said was more due to expectations of higher volumes of US borrowing than the Fitch downgrade.

Stephen Innes, managing partner at SPI Asset Management, said the downgrade will be "unlikely" to "cause a significant Treasuries sell-off or prompt a major shift in investor behavior mainly because investors experienced a similar downgrade from S&P in 2011 and came away unscathed."

Michael Hewson, chief market analyst at CMC Markets UK, agreed the impact would be minimal.

"The loss of the AAA rating is damaging from a political point of view, but it changes little in the wider scheme of things when it comes to the investability of the US relative to its peers," he said.

"It's not as if China, or any other country in Europe is any safer when it comes to investability, as well as political stability."

The downgrade follows a long, drawn-out row between Republicans and Democrats earlier this year over raising the US borrowing ceiling, which had fueled fears of a devastating default by the world's top economy.

While a deal was eventually struck, the saga rattled markets and reinforced the sense of long-running deadlock on Capitol Hill that has seen the gears of government jammed up.

In an interview with CNBC, Fitch Ratings senior director Richard Francis pointed to a "pretty steady deterioration in governance over the last couple of decades" in the United States.

Among the elements he highlighted was January 6, referring to the date in 2021 when supporters of Donald Trump stormed Congress in a bid to prevent certification of his rival Joe Biden's election victory.

Other factors, he added, included "constant brinksmanship surrounding the debt ceiling" along with Republicans and Democrats' inability to generate "meaningful, long-term solutions" on fiscal issues surrounding programs like social security and Medicare.

New York - Dow: DOWN 1.0 percent at 35,282.52 (close)

New York - S&P 500: DOWN 1.4 percent at 4,513.39 (close)

New York - Nasdaq: DOWN 2.2 percent at 13,973.45 (close)

London - FTSE 100: DOWN 1.4 percent at 7,561.63 (closed)

Frankfurt - DAX: DOWN 1.4 percent at 16,020.02 (closed)

Paris - CAC 40: DOWN 1.3 percent at 7,312.84 (closed)

EURO STOXX 50: DOWN 1.6 percent at 4,336.50 (closed)

Tokyo - Nikkei 225: DOWN 2.3 percent at 32,707.69 (close)

Hong Kong - Hang Seng Index: DOWN 2.5 percent at 19,517.38 (close)

Shanghai - Composite: DOWN 0.9 percent at 3,261.69 (close)

Euro/dollar: DOWN at $1.0940 from $1.0984 on Tuesday

Pound/dollar: DOWN at $1.2711 from $1.2777

Euro/pound: UP at 86.04 from 85.97 pence

Brent North Sea crude: DOWN 2.0 percent at $83.20 per barrel

West Texas Intermediate: DOWN 2.3 percent at $79.49 per barrel