On Thursday, Asian stock markets experienced a downward trend following Wall Street’s lead after Fitch Ratings downgraded the credit rating of the United States government.
Tokyo’s market benchmark fell nearly 1.5%, while Shanghai, Hong Kong, and Seoul also saw declines. However, oil prices managed to edge higher amidst the market uncertainty.
Wall Street’s Downturn
The major catalyst for this market slump was the significant one-day decline experienced on Wall Street. Fitch Ratings reduced the U.S. government’s credit rating by one level, citing rising debt and a “steady deterioration in standards of governance.” The downgrade came after Congress pushed Washington dangerously close to defaulting before finally agreeing to raise the borrowing limit.
Despite the initial shock, some experts view this downgrade as largely irrelevant, as it brings the U.S. rating more in line with other major economies. Kristina Hooper of Invesco stated that the timing of the downgrade was odd, considering the debt ceiling issue was already resolved.
Asian Markets React
Tokyo’s Nikkei 225 dropped 1.4% to 32,244.08, and the Shanghai Composite Index lost 0.2% to 3,254.37. Hong Kong’s Hang Seng retreated 0.5% to 19,429.17, while Seoul’s Kospi gave up 0.8% to 2,597.36. Sydney’s S&P-ASX 200 also declined 0.5% to 7,318.20, while Jakarta showed gains. Other Southeast Asian markets experienced declines as well.
Impact on U.S. Market
The S&P 500 was significantly impacted, sinking 1.4% to 4,513.39, marking its second-straight loss after reaching a 16-month high the previous week. The Dow Jones Industrial Average also dropped 1% to 35,282.52, and the Nasdaq composite experienced a more substantial decline of 2.2% to 13,973.45.
Significance of Fitch Downgrade
The Fitch downgrade holds significant implications for the global financial system, as U.S. Treasuries are typically considered among the safest investments. The agency cited repeated standoffs in Congress over the government’s debt limit as a factor in the downgrade. It is worth noting that Standard & Poor’s had previously stripped the U.S. of its AAA rating in 2011 after a similar debt limit fight, which raised borrowing costs by $1.3 billion that year, according to the Government Accountability Office.
Economic Outlook and Federal Reserve Influence
Investors are closely observing the U.S. economy’s performance to see if it can avoid a widely expected recession following multiple interest rate hikes aimed at controlling inflation. Recent optimism has driven the S&P 500 up by 19.5% in the first seven months of the year.
A report by payroll processor ADP indicated that hiring in the private sector remained strong, even though it slowed in July compared to the previous month. Such robust hiring could help ease recession concerns but may also prompt the Federal Reserve to address upward price pressure.
Federal Reserve Chair Jerome Powell has highlighted Friday’s comprehensive jobs report as a key factor influencing the central bank’s next move in September.
Companies and Earnings Reports
On Wall Street, several companies saw significant declines in their stock values. Microsoft, Nvidia, and Amazon all fell more than 2.5%.
Generac Holdings, a company specializing in generators and power products, experienced a notable drop of 24.4% after reporting weaker profits than analysts expected. SolarEdge Technologies also saw an 18.4% decline following a weaker-than-forecasted profit and revenue growth. The company attributed the pressure to higher interest rates affecting U.S. residential customers.
On the other hand, some companies outperformed profit expectations, such as CVS Health, which rose 3.3% after reporting milder results than anticipated. Humana also impressed investors, climbing 5.6% after surpassing expectations.
Energy Markets and Currency
Benchmark U.S. crude managed to edge up 7 cents to $79.56 per barrel on the New York Mercantile Exchange, following a previous day’s fall to $79.49. Brent crude, the international oil price basis, gained 8 cents to reach $83.28 per barrel in London, after losing $1.71 the previous session to $83.20.
The dollar held steady at 143.28 yen, while the euro declined slightly from $1.0943 to $1.0934.