Stocks slump following Fitch’s US downgrade

investmentnews.com:

Global stocks dropped as Fitch Ratings’ downgrade of the US sovereign credit grade spurred a rapid retreat from riskier assets.

Broad losses in Europe dragged the benchmark regional index down by the most in almost four weeks. S&P 500 and Nasdaq 100 futures slid more than 1%, signaling a sharp drop on Wall Street following five months of gains for US stocks.

Fitch stripped the US of its top-tier rating, criticizing the ballooning fiscal deficit and an “erosion of governance.” The downgrade serves up an extra dose of jeopardy for equity investors already concerned over the risks of recession and whether this year’s run-up in stock markets is sustainable. 

“One can have the feeling that the market is looking for excuses to take some profits,” said Alexandre Baradez, chief market analyst at IG Markets in Paris. “But rather than the Fitch downgrade, I suspect that what’s currently being priced is the growing risk of an economic slowdown. The downward trend started to emerge yesterday on the back of disappointing Chinese and US data, which suggests it’s not really about the rating downgrade, but rather the risk of a slowdown.”

Reaction to the Fitch news was calmer in Treasuries and the dollar. Yields were steady, while a gauge of greenback strength was little changed. 

Investors said the downgrade to AA+ from AAA shouldn’t harm the top-notch status of US assets over the longer-term, citing a lack of alternatives and the economy’s solid growth. A similar event in 2011, when S&P Global Ratings removed the highest rating for the US following an earlier debt-ceiling crisis, also offers a useful guide. While that triggered a selloff in risk assets, it boosted Treasuries as investors sought havens.  

“The latest downgrade does not