Standard & Poor’s downgrades US to AA+
“That the US Credit Rating was revised, is a headline from a 2011 event, but interestingly enough (in this time of COVID-19 pandemic), the US credit rating is again under threat of downgrade – this time (in August 2020) by ratings agency, Fitch.” Continuum Financial Planners Pty Ltd note that Fitch has retained the US AAA credit rating for now, but has placed it on a negative watch.
Introduction
Standard & Poor’s has downgraded the US’s AAA credit rating to AA+ for the first time ever, and kept the rating outlook negative, based on its judgment that the debt ceiling deal agreed last week by lawmakers fails to cut spending enough to reduce the US’s record budget deficits.
This action from Standard & Poor’s comes despite the fact that the US Congress is discussing the powers and influence credit agencies have on the broader economy in the Dodd Frank Act. It has followed through on the warning it gave prior to debt ceiling resolution being agreed last week.
Rating revision impact on markets/economies
At this point it’s difficult to know for certain if there will be any significant effect on the market as the potential for a credit rating downgrade was already factored into market expectations during the debt ceiling political stalemate. We previously commented that a temporary resolution to the debt ceiling situation wouldn’t settle markets and we still believe that only a credible long-term solution to US debt will create prolonged calm.
Treasuries are being pulled between safe haven buying and the lower credit rating. We may see better rated sovereigns around the world continue to be more expensive and offer lower yields in the short term as their popularity increases. But unless Moody’s and Fitch also announce a downgrade, we don’t believe the actions of Standard & Poor’s will result in forced selling of US bonds. It’s also worth noting that Fitch isn’t expected to issue its rating until the end of the month.
Rating revision impact on investors
Ultimately these events do mean that for Standard & Poor’s there’s a slightly higher chance of a US default, but in reality most are agreed that the US can continue to pay its obligations. In addition, the political turmoil that has led to this uncertainty is still one that can be voted away if necessary.
Opportunities this presents
Despite what seems like more dramatic events coming out of the US, we still believe that it’s unlikely to lead to a longer-term issue for markets and produce a contagion effect. Investors need to continue to be aware of the short-term volatility and weakness, but we remain positive on the underlying market fundamentals playing out in growth markets and believe reactions like these present opportunities for building longer-term positions.
Summary
- The next few days are important in terms of assessing the true market impact but we don’t anticipate a contagion effect.
- We continue to see any weakness as a result of these short-term issues as potential buying opportunity of growth assets for our longer-term strategy.
- Extreme financial asset market volatility and the adverse impact this has on the direction and health of the global economy is well understood by policy makers. As in the past, key central banks and other policy makers are likely to rally around and implement coordinated action to steer the global economy onto a more favourable growth path.
The issue of the information contained in this article is solely authorised by Advance Asset Management Limited (Advance) ABN 98 002 538 329, Australian Financial Services Licence No. (AFSL) 240902, a member of the Westpac Banking Corporation ABN33 007 457 141 (Westpac) group of companies (Westpac Group).
Credit Ratings matter
The team of experienced advisers at Continuum Financial Planners Pty Ltd monitor the credit rating of countries in which client funds are invested: whilst the downgrade of the credit rating of the US in 2011 was concerning, the impact was not as great on that economy as a downgrade elsewhere might have been. The fact that the USD (the US dollar) is a global reserve currency meant that the downgrade had minimal impact on the performance of their investment markets at the time.
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