Asia markets fall after Fitch downgrades US rating; STI down 0.9%

HONG KONG - Asian stocks dropped on Wednesday as the wind came out of the latest rally, with traders jolted by ratings agency Fitch’s surprise cut to the United States’ top-tier sovereign credit rating.

Japan’s Nikkei slid 2.04 per cent, while Australian shares slumped 0.83 per cent and South Korea’s Kospi Index was down 1.34 per cent.

Hong Kong’s Hang Seng Index fell 1.88 per cent while China’s mainland benchmark lost 0.84 per cent.

Singapore’s Straits Times Index was down 0.9 per cent at 11.51am local time.

Asian stocks were also weighed by declines on Wall Street overnight.

US stock futures, the S&P 500 e-minis, pointed 0.2 per cent lower on Wednesday.

Fitch cut the United States by one notch to AA+ from AAA, citing fiscal deterioration, a decision announced after the Wall Street close on Tuesday.

US 10-year Treasury yields declined by about two basis points to 4.025 per cent in Tokyo.

“Most of the Asia turmoil this morning and the Treasury yields move is triggered by the Fitch decision,” said Mr Manishi Raychaudhuri, head of Asia-Pacific equity research at BNP Paribas.

“It’s kind of a short-term knee-jerk reaction, so we will have to wait and watch for how this pans out.”

Investors counter-intuitively fled to the relatively safety of sovereign debt from riskier equity markets.

Treasuries, whose yields fall when prices rise, were also bought when Standard & Poor’s cut the US top “AAA” rating by one notch to “AA-plus” in 2011.

The US dollar moved lower against a basket of major currencies immediately after the announcement, but was up 0.1 per cent in Asian trading.

Gold,  which is priced in US dollars, received a safe haven boost. Spot gold was up 0.2 per cent at US$1,946.97 per ounce by 0312 GMT, while US gold futures rose 0.3 per cent to US$1,984.

While the investor reaction to the downgrade was relatively contained, it has injected some uncertainty into financial markets.

“This basically tells you is the US government’s spending is a problem. It’s an unsustainable budget situation because the economy can’t even grow its way out of this problem going forward,” said Mizuho Securities US chief economist Steven Ricchiuto. “Therefore, they’re going to have to either tackle it or accept the consequences of potential further additional downgrades.”

Looking beyond the Fitch downgrade, the main area of focus will still be central banks, corporate earnings and, in China specifically, stimulus prospects the geopolitical issues, he said.

Oil prices gained on Wednesday, trading near their highest since April, after industry data showed a much steeper-than-expected draw last week in US crude oil inventories.

West Texas Intermediate crude futures ticked up 1 per cent to US$82.18 while Brent crude rose to US$85.73 per barrel. REUTERS