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(Reuters) -Global share markets and oil prices fell while Treasury yields and the dollar advanced on Wednesday as investors digested an unexpected downgrade of the United States’ top-tier sovereign credit rating and private payrolls data that pointed to U.S. labor market resilience.
Fitch on Tuesday evening cut the U.S. by one notch to AA+ from AAA, citing fiscal deterioration. Investors showed little sign of panic.
“Look, no one is seriously considering the prospect that the U.S. would ever fail to make a payment on its debt,” said Eric Winograd, chief economist at AllianceBernstein (NYSE:AB) in New York.
“There will continue to be demand for both long-term and short-term Treasuries, and I don’t see this downgrade as a significant signal of any trouble ahead.”
On Wall Street, the Dow Jones Industrial Average fell 0.83%, to 35,335, the S&P 500 lost 1.23%, to 4,520 and the Nasdaq Composite dropped around 2% to 14,002.
The downgrade hit global stock markets, taking Europe’s STOXX 600 index down 1.35%. Asia-Pacific stocks dropped earlier, down about 2%, partly because of signs of weakness in China’s economy.
Long-term U.S. Treasury yields gained after strong private employment data and the announced refunding of the U.S. government’s maturing debt. U.S. 10-year yields were up 3.7 basis points to 4.084%.
The U.S. Treasury said on Monday it expected to borrow $1.007 trillion in the third quarter, the largest amount yet for that period. It also said it plans to “incrementally” increase the size of its auctions across the board in the third quarter and continue increases in future quarters.
The dollar rose on Wednesday as investors shrugged off Fitch’s downgrade while the private payrolls data bolstered the greenback as it suggested further labor market resilience. The U.S. dollar index was up 0.6%.
Credit default swaps, which insure exposure to U.S. Treasuries, were little moved, according to S&P Global (NYSE:SPGI) Market Intelligence data. The CBOE Market Volatility Index jumped around 16% on Wednesday but was still near the lows of the last 12 months.
“The lack of movement in U.S. Treasury Bonds and the dollar index suggests the market has already largely quantified and assessed the damage done from recent fallouts,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
Fitch’s move, which came after it had placed the ratings on negative watch in May, drew an angry response from the White House, which called it “arbitrary and based on outdated data” as it came two months after a debt ceiling agreement that averted a U.S. default.
Investors drew comparisons with what happened when Standard & Poor’s cut the U.S.’s AAA rating in 2011 after the global financial crisis.
Investors then also took refuge from riskier equities by piling into Treasuries, but the rally in bonds was much larger than so far this time.
“S&P being the first to downgrade 12 years ago was far bigger news and has allowed investors to adjust for the most important bond market in the world not being a pure AAA anymore, but it’s still a big decision,” Deutsche Bank (ETR:DBKGn) strategist Jim Reid said.
While investors say the downgrade is unlikely to have a big impact on U.S. Treasuries, which underpin the financial system as an unrivalled global safe asset, it has injected some uncertainty into financial markets and cast renewed attention on the debt metrics of the world’s largest economy.
DISAPPOINTING DATA
Tony Sycamore, an analyst with IG, said that apart from the Fitch move, there had been some disappointing data in the United States and China and some weaker-than-expected earnings, so people were taking money off the table.
Elsewhere, Japan’s 10-year bond yield hit a nine-year peak on Wednesday as investors continued to test the Bank of Japan’s tolerance for higher yields following Friday’s surprise policy tweak. The yen was little changed against the dollar, looking to stem three sessions of losses.
Attention was still firmly on monetary policy, with uncertainty around how much the Bank of England will increase rates on Thursday. The decision is essentially seen as a coin toss with investors betting on a roughly 60% chance of a 25 basis-point move after an unexpectedly large 50 basis-point increase in June.
Economic data was also in focus, with the U.S. due to publish jobs market data this week.
Oil prices fell on Wednesday after sharp gains despite a historic drop in U.S. crude stocks, as traders de-risked following Fitch’s U.S. downgrade.
U.S. crude fell 2.32% to $79.48 per barrel and Brent was at $83.17, down 2% on the day.
Gold prices pared gains on Wednesday, hurt by a stronger dollar and a rebound in bond yields as investors digested Fitch’s move and focused on U.S. nonfarm payrolls data later this week. Spot gold dropped 0.4% to $1,935 an ounce.
