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U.S. markets may not see lasting impact from Fitch downgrade

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U.S. markets may not see lasting impact from Fitch downgrade

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 26, 2023. REUTERS/Brendan McDermid/File Photo

Aug 2 (Reuters) – Most major brokerages do not expect a sustained drag on U.S. financial markets following Fitch’s move to strip the country of its top credit rating, noting that the economy is stronger now than in 2011 when S&P Global downgraded U.S. sovereign debt.

Early moves in U.S. financial markets on Wednesday indicated some aversion to riskier assets as investors assessed the impact of the surprise downgrade.

Stock index futures fell, with Nasdaq futures down 0.7%, while Treasury yields slid by 3 basis points. The dollar climbed 0.2%, after slipping broadly in the wake of the downgrade.

Fitch Ratings on Tuesday cut its rating on U.S. long-term foreign-currency debt by one notch to ‘AA+’, citing fiscal deterioration over the next three years and repeated debt ceiling negotiations that threaten the government’s ability to pay its bills.

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“Investors have lived through the S&P downgrade in 2011 and remember coming away unscathed. Another might be that people have gotten used to an elevated level of deficit spending,” said Steven Zeng, strategist at Deutsche Bank.

“We see the market impact from the downgrade news as ultimately limited, and Friday’s jobs report could trump the downgrade news as monetary policy is still the dominant driver for yields.”

The 10-year U.S. Treasury yield declined about 3.6 basis points (bps) to 4.0109% immediately after Fitch’s decision, indicating investors’ preference for safer assets.

“The Treasury market was highly volatile in the wake of S&P’s downgrade in 2011, but the underpinnings of the U.S. economy were very different then… given the resilience of the U.S. economy and the tightness of labor markets,” said J.P.Morgan rate strategist Jay Barry.

Data released last week showed the U.S. economy grew faster than expected in the second quarter as a resilient labor market supported consumer spending, with markets now pricing in a soft-landing scenario for the economy despite rapid interest rate hikes by the Federal Reserve.

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J.P.Morgan also noted that the spending cuts that ended the debt ceiling crisis of 2011 reduced federal spending by 0.7% of Gross Domestic Product (GDP) the following year, while the deal signed into law earlier this year is expected to lower federal spending by less than 0.2% of GDP next year.

Markets took comfort when Fitch did not adjust U.S. “country ceiling”, which it affirmed at AAA, showing strength in the ability of the corporate sector to convert local currency into a foreign currency for debt repayments.

“If Fitch had also lowered the country ceiling, it could have had negative implications for other AAA-rated securities issued by U.S. entities,” said Goldman Sachs economists led by Jan Hatzius.

Moody’s still holds a ‘Aaa’ rating on U.S. government debt. In a review in July, it cited economic strength, “extraordinary” funding capacity, and “central roles of the U.S. dollar and the U.S. Treasury bond market in the global financial system.”

Reporting by Susan Mathew in Bengaluru; Editing by Saumyadeb Chakrabarty

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Our Standards: The Thomson Reuters Trust Principles.

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Top US Senate Democrat to block Trump DOJ nominees over Qatar airplane

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Top US Senate Democrat to block Trump DOJ nominees over Qatar airplane
U.S. Senate Democratic Leader Chuck Schumer on Tuesday vowed to block all of President Donald Trump’s nominees to the Justice Department until the agency reports what it knows about Qatar’s offer to give Trump’s administration a $400 million airplane.
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Self-proclaimed 'king of Germany' arrested in plot to overthrow government

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Self-proclaimed 'king of Germany' arrested in plot to overthrow government

The self-styled “king” of Germany and three of his senior “subjects” were arrested for attempting to overthrow the state, according to media reports. 

Peter Fitzek, 59, was taken into police custody during morning raids conducted Tuesday in seven German states, the BBC reported. 

Fitzek’s group, the Reichsbürger, or “citizens of the Reich,” has also been banned by the government. 

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Peter Fitzek, the self-proclaimed head of the so-called “Kingdom of Germany,” poses for a photo with the kingdom’s constitution in Wittenberg, Germany, Oct. 23, 2023.   (Jens Schlueter/AFP via Getty Images)

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The group’s aim is to establish the Königreich Deutschland, or “Kingdom of Germany.”

“I have no interest in being part of this fascist and satanic system,” Fitzek previously told the news outlet in a 2022 interview.

Reichsbürgers reportedly have their own currency, flag and identification cards and want to set up separate banking and health systems.

The Reichsbürger undermined “the rule of law,” said Alexander Dobrindt, Germany’s interior minister, by creating an alternative state and spreading “antisemitic conspiracy narratives to back up their supposed claim to authority,” the news report states. 

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Fake German currency

Peter Fitzek, the self-proclaimed head of the so-called “Kingdom of Germany,” shows the paper currency he created himself in Wittenberg, Germany, Oct. 23, 2023.  (Jens Schlueter/AFP)

He said the group finances itself through crime. 

Fitzek, who claims to have thousands of “subjects,” denied having violent intentions but also called Germany “destructive and sick.”

In 2022, dozens of people associated with the Reichsbürger were arrested for plotting to overthrow the German government in Berlin. They were accused of planning a violent coup, which included kidnapping the health minister in an effort to create “civil war conditions” to bring down German democracy, according to the BBC. 

Passports and IDs made by a German man accused of trying to overthrow the state

Self-made identity and banking documents of the so-called “Kingdom of Germany” are pictured in Wittenberg, Germany, Oct. 23, 2023. (Jens Schlueter/AFP via Getty Images)

 

Once dismissed as eccentric by critics, the group is now seen within Germany as a serious threat as the far right has grown politically over the past decade, the report said. 

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Costa calls for reforms in Bosnia to ensure EU membership progress

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Costa calls for reforms in Bosnia to ensure EU membership progress
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After his trip to Belgrade, European Council President António Costa visited Sarajevo on Tuesday as part of his Balkans tour. He was given a warm reception upon his arrival before meeting with Bosnia’s presidency.

In a statement, the European Council chief announced that the EU “remains committed” to the country’s European future. He also praised Željka Cvijanović, Denis Bećirović, and Željko Komšić — members of the Western Balkan country’s three-way presidency — for their role in maintaining stability and security in the country and the region.

Recently, tensions have been brewing domestically over the leader of the entity of the Republika Srpska (RS), Milorad Dodik’s actions, which the state-level authorities denounced for undermining the country’s constitutional order.

Western powers and the EU have condemned Dodik for his provocations after he had suggested that the Dayton Agreement, the peace agreement that formally ended the Bosnian War in 1995, had outlived its purpose.

In his statement, Costa underlined the importance of the Dayton accords, set to mark its 30th anniversary this year.

“And this year, on the 30th anniversary of Srebrenica genocide and the Dayton (and) Paris Agreement, I believe that it is an important message to remember,” said Costa.

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Costa also outlined that some reforms are needed to ensure Bosnia remains on the path to EU membership.

“We need the approval of two judiciary laws, the appointment of a chief negotiator, and the adoption of the reform agenda to move towards on the Bosnia and Herzegovina in the European path.”

Bosnia is the only country that does not benefit from the EU’s Growth Plan for the Western Balkans. Costa stressed that implementing these reforms is of paramount importance to ensure that Bosnia’s citizens benefit from the EU plan.

“I would like to see Bosnia and Herzegovina joining the other Western Balkans partners in profiting from all that the European Union has to offer,” the Council president noted.

Costa will next travel to Montenegro and Albania on Wednesday, for meetings with President Jakub Milatović in Podgorica and President Bajram Begaj in Tirana. He’ll conclude his tour with a visit to Skopje in North Macedonia, where he will meet Prime Minister Hristijan Mickoski.

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Additional sources • AP

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