Global equities were knocked down a peg on Wednesday after Fitch downgraded the US credit rating from AAA to AA+, citing concerns about governance and fiscal health.
Fitch’s downgrade reflects the United States’ ability to pay back its debt, and the mere suggestion the fiscal health of the world’s largest economy was deteriorating was enough to send stocks into free fall.
The probability of the US actually defaulting on their debt is minuscule.
Nonetheless, the FTSE 100 was down over 1.8% in early trade before recovering some losses to trade 0.9% weaker.
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance,” credit rating agency Fitch said in a statement.
The US credit rating was last downgraded in 2011 by S&P, and markets reacted similarly with sharp declines in stocks before a steady recovery.
“There is a saying that when the US sneezes, the rest of the world catches a cold. That is certainly true with how the US government’s credit rating downgrade has troubled markets globally,” said Laith Khalaf, head of investment analysis at AJ Bell.
“Ratings agency Fitch lowered the rating from the top level of AAA to AA+ amid concerns about the country’s finances and its debt burden. In effect, this is saying the US is now higher risk than previously thought. The news took markets by surprise, sending Asian and European indices down by approximately 1%.
“When the debt of the world’s largest economy is seen as lower quality, it will naturally trouble investors and make them rethink their portfolios. It also might surprise some people given how the US economy is proving to be more resilient than expected.”
FTSE 100 movers
ConvaTec was the FTSE 100’s top riser after releasing a sterling set of half-year results. Reported operating profit jumped 41% to $123.4m, while ConvaTec recorded a $10m increase in adjusted EBITDA to $262m.
Karim Bitar, Chief Executive Officer of ConvaTec, commented:
“This performance demonstrates the momentum Convatec is building – revenue growth is accelerating and we are expanding our operating margin, despite ongoing investments to drive future growth and the challenging inflationary back drop. Given the strength of performance and the encouraging outlook, particularly in AWC, we are increasing our guidance for the full year.”
ConvaTec was 7% higher at the time of writing.
Taylor Wimpey shook off the doom and gloom of yesterday’s UK house price data as their shares ground out a 2% gain. Taylor Wimpey’s revenue fell 21% in the first half of the year but remained steadfast in their shareholder returns with a 10% increase to the dividend. Completions were slightly above management’s forecasts, and guidance for the full year was edged up.
Endeavour Mining was the FTSE 100’s biggest loser after the gold producer reported lower production in the six months ending June 2023 compared to the same period last year. Endeavour Mining shares were down 5.3% at 1.54 pm on Wednesday.