Moody’s Ratings recent downgrade of the Government of United States of America’s (US) long-term issuer and senior unsecured ratings to Aa1 from Aaa, is weighing heavy on the equity-index futures and dollar.
On Monday, stock futures slipped with Dow Jones Industrial Average dropping 370 points, or 0.87 per cent, while S&P 500 futures was down 77 points, or 1.29 per cent. Nasdaq 100 futures had lost 1.71 per cent.
US Dollar Index, which tracks the strength of the dollar against a basket of major currencies, fell below 100.5 and was weaker by almost 0.8 per cent at 100.3.
Markets react to Moody’s downgrade
Most Asian shares fell on Monday, but Shanghai was flat at 3,367.58, up by 0.12 points. Taiwan was down 1.46 per cent and Nikkei 225 fell by 0.68 per cent. India’s Nifty 50 was down 0.32 per cent at 1:30 PM UAE time.
Dubai Financial Market’s general index was defying the trend, up 0.93 per cent to 5505.
On Friday, Moody’s said the downgrade came in the wake of piling debt.
Moody’s expected federal deficits to reach nearly 9 per cent of GDP by 2035, up from 6.4 per cent in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation. It expected the federal debt burden to rise to about 134 per cent of GDP by 2035, compared to 98 per cent in 2024.
“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” said the rating agency.
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.
“Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”
On moving the US to stable from negative, Moody’s added: “The stable outlook reflects balanced risks at Aa1. The US retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency. In addition, while recent months have been characterised by a degree of policy uncertainty, we expect that the US will continue its long history of very effective monetary policy led by an independent Federal Reserve.
“The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period. While these institutional arrangements can be tested at times, we expect them to remain strong and resilient.”
Stephen Innes, managing partner at SPI Asset Management, said: “S&P 500 futures found dip support well above 5,900, showing that this isn’t an outright panic. Bears had their shot, but bulls are still defending key levels.”
