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Fitch Ratings downgraded US long-term debt late on Tuesday from AAA to AA+, citing this spring’s debt ceiling standoff as a major reason.
That’s a huge blow to the US. The global financial system relies on the promise that the US government will always pay back its debts. That trust makes the US dollar the most widely held currency worldwide. This downgrade threatens to complicate that.
Still, US markets barely reacted to the news in after-hours trading on Tuesday, and US Treasuries were holding steady.
But that doesn’t mean they won’t react, eventually. US stock futures were pointing to a weaker open Wednesday, and global markets stumbled overnight.
Past performance is no guarantee of future results, but a look back at market history can give us an idea of what might happen.
In the midst of the very tense debt ceiling standoff of 2011, Standard and Poor’s downgraded US debt for the first time in history.
That downgrade happened on a Friday afternoon, so investors had a weekend to think about their next move.
It didn’t help.
On the first trading day after the downgrade the S&P 500 plummeted by 6.5%. Markets experienced their most volatile week since the global financial meltdown in 2008, and it took another six months for stocks to climb back up to their previous highs.
Still, this time could be different. Investors know this devil — they’ve been through it before, and they saw that the downgrade didn’t actually raise US borrowing costs significantly or hurt Treasury markets. US Treasuries actually rose as investors barreled out of stocks.
“My sense is that the Fitch downgrade of the US credit rating is an insignificant development and will not move financial markets or the economy,” said Joseph Brusuelas, chief economist at RSM US. “As long as the Federal Reserve continues to treat US issued paper as AAA rated credit so will financial market participants.”
A little bit more: This May, Fitch agency put the country’s perfect AAA rating on watch as the debt ceiling fight raged on. During that time, lawmakers in Congress were engaged in a bitter dispute over raising the debt limit to keep the federal government from defaulting on its financial obligations. The deal was ultimately signed on June 2, just three days before the US Treasury said the US could run out of money to pay its bills.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” Fitch said of the downgrade.
The downgrade, said Fitch, reflected the “expected fiscal deterioration” of the country over the next three years. The rating agency cited the “high and growing” government debt, which currently stands at more than $32 trillion (that’s just under $100,000 for every single person in America).
Former US Treasury Secretary, Larry Summers, called the decision bizarre. “The United States faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept,” he said on Twitter, now formally known as X.
The current US Treasury Secretary Janet Yellen on Tuesday said that the timing of the downgrade felt off.
“I strongly disagree with Fitch Ratings’ decision,” said Yellen. “The change by Fitch Ratings announced today is arbitrary and based on outdated data.”
Just before the Fitch downgrade, the stock market managed to notch its best performance through July in 26 years, according to data from S&P Dow Jones Indices.
The benchmark S&P 500 index closed last month with a boost of about 21% for the year.
Along with the Nasdaq Composite, the S&P 500 notched its fifth winning month in a row in July, marking the broad-based index’s longest monthly winning streak since 2021.
Gains in the US market this year have largely been driven by the so-called “Magnificent Seven,” a group of stocks favored for their simultaneously defensive and growth qualities as well as their roles in developing artificial intelligence products. Tech behemoths Nvidia
(NVDA), Apple
(AAPL), Amazon
(AMZN), Alphabet
(GOOG), Meta Platforms, Microsoft
(MSFT) and Tesla
(TSLA) comprise the group.
Read more here.
A Congressional select committee is investigating BlackRock
(BLK), the world’s largest asset manager, and MSCI, one of the biggest providers of index funds, to determine whether they are investing Americans’ savings in Chinese companies blacklisted by the US government for security and human rights issues.
The Select Committee on the Chinese Communist Party of the US House of Representatives sent letters to BlackRock CEO Larry Fink and MSCI CEO Henry Fernandez on Monday notifying both parties that it is investigating their investments in certain Chinese companies, according to documents reviewed by CNN.
“Our review has shown that, as a direct result of decisions made by MSCI, these Americans are now unwittingly funding PRC companies that develop and build weapons for the People’s Liberation Army (PLA) — the PRC’s military — and advance the CCP’s stated mission of technological supremacy,” wrote the Select Committee’s Chairman, Republican Rep. Mike Gallagher of Wisconsin, and its ranking member, Rep. Raja Krishnamoorthi, a Democrat from Illinois. The committee sent an identical letter to BlackRock.
By sending massive amounts of American money to companies linked to the Chinese military and human right abuses, the letter said, BlackRock and MSCI are “exacerbating an already significant national security threat and undermining American values.”
The Committee said it found that BlackRock had invested more than $429 million across five funds into Chinese companies that “act directly against the interests of the United States.”
They also said that they identified at least 40 companies listed on the MSCI indexes that are designated on governmental red-flag lists.
“The majority of our clients’ investments in China are through index funds, and we are one of 16 asset managers currently offering US index funds investing in Chinese companies,” BlackRock said in a statement to CNN. “With all investments in China and markets around the world, BlackRock complies with all applicable US government laws. We will continue engaging with the Select Committee directly on the issues raised.”
MSCI did not respond to requests for comment.
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