Global stock markets extend losses on US credit downgrade

Major stock markets mostly slid further on Thursday as traders moved out of riskier assets and into havens such as bonds, the dollar and yen after Fitch this week stripped the United States of its top credit rating.

Wall Street’s main stocks indices dipped at the opening bell, with the Dow shedding 0.3 per cent.

Meanwhile, Europe’s main equity indices were also lower, with London’s blue-chip FTSE-100 index down 0.7 per cent after the Bank of England hiked its key interest rate for a 14th time in a row, by a quarter-point to 5.25 percent as UK inflation stays high.

Asian indices also tumbled for a second day running following a slide Wednesday on Wall Street.

“Global markets extended yesterday’s declines as investors digested the prospect that US government debt is now considered lower quality following Fitch’s downgrade,” noted Laith Khalaf, head of investment analysis at AJ Bell.

“The decision by the credit agency to cut the rating led to higher US government bond yields which in turn has a negative impact on equities.”

Fitch’s decision Tuesday to downgrade the United States to AA+ from AAA sparked a fiery rebuttal from Washington, and was met with bewilderment by many analysts and economists.

Stock markets have rallied in recent months on hopes that the US economy would have a “soft landing”, that is avoid a recession, from the rate-hiking campaign by the Federal Reserve to bring down inflation.

Data released Thursday on unemployment, labour productivity and costs was in line with the US economy dodging a recession, but failed to boost stocks.

Briefing.com analyst Patrick O’Hare said there is a “nagging notion that the stock market is due for a pullback after its big run, which is perhaps the key sentiment overhang at the moment.”

Rather than a push to sell, there has been a falloff in buying interest in equities, he added.

Across the Atlantic, the Bank of England’s rate hike was widely expected and had little impact on trading in the pound, and the FTSE-100 stock index pared losses after the announcement.

Analysts are beginning to see the possibility the BoE may not hike rates much further if at all, much like expectations that the US Federal Reserve and the European Central Bank are also close to “peak rates”.

With two inflation reports due before the BoE’s next rate-setting meeting, “there is a chance that today’s hike could well have been the final one of this cycle,” said Michael Hewson at CMC Markets.

“Today’s decision by the central bank has prompted a modest rebound in housing and banking stocks off the lows of the day, as traders take the view that the Bank of England is close to calling a pause on further rate hikes,” he added.

Oil prices rose after Saudi Arabia extended its voluntary oil production cut of one million barrels per day for another month, keeping up its campaign to prop up prices.

Later Thursday, Apple and Amazon publish their earnings for the second quarter.

On Friday, all eyes will be on US payroll figures for an idea about the Federal Reserve’s next moves on interest rates.

Rate-sensitive short-dated British government bond yields dropped on Thursday and real-estate stocks rose, after the Bank of England raised interest rates by 25 basis points, a step down in the pace of monetary tightening from its previous meeting.

The BoE raised its key interest rate by a quarter point to a 15-year peak of 5.25%. Market pricing ahead of the meeting had reflected a reasonable chance of a 50-basis point increase.

However, unlike the U.S. Federal Reserve or the European Central Bank - which also both raised rates by a quarter-point last week - the rate-setting Monetary Policy Committee gave little suggestion that hikes were about to end as it battles high inflation.

The two-year yield dropped as much as 14.9 basis points, and was last down 6 basis points at 4.94%.

Shares in homebuilders and real estate companies, which have suffered in recent months as higher mortgage costs raised prices for home buyers, rallied, each up around 0.75%.

Moves in benchmark 10-year gilts were more muted. The yield briefly dipped to trade flat on the day after BoE’s move, but was last up 4.5 basis points at 4.45%. Bond yields move inversely to prices. Due to broad pessimism across share markets globally, the FTSE 100 remained down 0.8% on the day and the mid-cap FTSE 250 only just edged into positive territory.

“The recent fall in inflation and signs of a faltering economy meant that the (rate-setting) MPC felt it had enough room to revert back to a 25bps rise in August,” said Thomas Pugh, an economist at RSM UK.

“However, one weak data point will not be enough for the Bank to be satisfied that inflation is now on a sustainable trajectory. We expect at least one more 25bps rate hike in September, whether that is followed by another one will depend on the inflation and labour market data between now and then.”

The pound fell by as much as 0.66%, hitting a fresh one month low after the meeting’s outcome. It was last at $1.266, 0.4% lower on the day, roughly where it was before the announcement.

Agencies