Most Asian equities sank Thursday on fears of a US default as the struggle to hammer out a debt deal led Fitch to warn the country’s gold-plated credit rating was at risk.
Nerves have been rattled across global markets owing to a lack of real headway in the standoff on Capitol Hill to increase the US borrowing limit so it can meet its debt obligations.
Talks earlier this week between President Joe Biden and Republican House Speaker Kevin McCarthy were described as “productive” but the two sides have made little progress since, with Republicans demanding spending cuts but Democrats calling for a “clean” increase.
And analysts said that while there is a broad expectation an agreement will finally be reached — likely at the last minute following a period of brinkmanship — investors were growing increasingly agitated and risk-averse.
On Wednesday, the uncertainty led Fitch to put the country’s AAA-ranked credit on “rating watch negative”.
The firm said the move “reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit” before June 1, when the US Treasury Department warned the government will run out of money, triggering a default.
Most economists warn that the failure of the United States to pay its bills would likely have devastating economic consequences for markets and the global economy.
“Fitch still expects a resolution to the debt limit before the X-date,” the ratings agency said in a statement.
“However, we believe risks have risen that the debt limit will not be raised or suspended before the X-date and consequently that the government could begin to miss payments on some of its obligations.”
The announcement raises the possibility of a first ratings downgrade since S&P did so during a similar standoff in 2011.
Tony Sycamore, of IG Australia, called the move “a bit of a slap” to both sides.
“It just adds urgency that these two guys get together, or these two parties get together because their lack of action is making the ratings agencies nervous, and I think the markets are very nervous as well,” he added.
– ‘We’re not going to default’ –
Observers warned that the move could force S&P and Moody’s to follow suit.
The Fitch news came after Wall Street had closed but markets there had already suffered another day of selling with all three main indexes deep in the red.
Much of Asia followed suit Thursday with Hong Kong down more than one percent, while Shanghai, Sydney, Seoul, Singapore, Manila and Jakarta were also in the red. Tokyo and Taipei edged up.
Still, McCarthy was hopeful a deal could be reached before June 1, saying: “I still think we have time to get an agreement, and get it done.”
“We’re not going to default. We’re going to solve this problem,” he told reporters.
And White House Press Secretary Karine Jean-Pierre said talks “remain productive”, adding: “We believe that we can get to a solution here. We can get to a bipartisan, reasonable agreement.”
She warned that failure to do so would have “catastrophic impacts in every single part of this country”.
“We’re talking about millions of jobs lost, devastating retirement accounts, and a recession.”
Worries over the possibility of more Federal Reserve interest rate hikes were also dampening sentiment.
Minutes from the US central bank’s most recent policy meeting showed officials split on what to do at their June gathering, with inflation still more than double the two percent target.
“Some participants commented that, based on their expectations that progress in returning inflation to two percent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings,” the minutes showed.
But “several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary”.
The minutes also showed Fed economists assume tight financial conditions “would lead to a mild recession starting later this year, followed by a moderately paced recovery”.
– Key figures around 0230 GMT –
Tokyo – Nikkei 225: UP 0.5 percent at 30,848.07 (break)
Hong Kong – Hang Seng Index: DOWN 1.5 percent at 18,825.17
Shanghai – Composite: DOWN 0.1 percent at 3,201.40
Euro/dollar: DOWN at $1.0743 from $1.0754 on Wednesday
Pound/dollar: DOWN at $1.2347 from $1.2365
Dollar/yen: UP at 139.61 yen from 139.43 yen
Euro/pound: UP at 87.00 pence from 86.94 pence
West Texas Intermediate: DOWN 0.1 percent at $74.26 per barrel
Brent North Sea crude: UP 0.1 percent at $78.40 per barrel
New York – Dow: DOWN 0.8 percent at 32,799.92 (close)
London – FTSE 100: DOWN 1.8 percent at 7,627.10 (close)