Source : THE AGE NEWS
By Stan Choe
US stocks, bonds and the value of the US dollar are drifting following the latest reminder that the US government seems to be hurtling toward an unsustainable mountain of debt.
The S&P 500 was mostly unchanged in afternoon trading after Moody’s Ratings became the last of the three major credit-rating agencies to say the US federal government no longer deserves a top-tier “Aaa” rating. The Dow Jones was up 84 points, or 0.2 per cent and the Nasdaq composite was 0.1 per cent lower.
Wall Street has had a choppy session to start the week after the Moody’s downgrade.Credit: AP
The Australian sharemarket is set to advance, with futures at 5am AEST pointing to a rise of 55 points, or 0.7 per cent, at the open. The ASX lost 0.6 per cent on Monday. The Australian dollar strengthened. It was 0.7 per cent higher at 64.52 US cents at 5am AEST.
Moody’s pointed to how the US government continues to borrow more and more money to pay for its expenses, with political bickering making it difficult to either rein in Washington’s spending or raise its revenue in order to get its ballooning debt under more control.
Nothing Moody’s said is new, of course, and critics have been railing against Washington’s inability to control its debt for many years. Standard & Poor’s lowered its credit rating for the US government in 2011.
Because the issues are already so well known, investors have likely already accounted for them, according to Brian Rehling, head of global fixed income strategy and other analysts at Wells Fargo Investment Institute. They’re expecting “limited additional market impact” following the initial reactions to the Moody’s move.
Stocks and US government bond prices at first fell sharply early in Monday’s trading, but they trimmed or shook off their losses as the day progressed.
A downgrade essentially warns investors globally not to lend to the US government at such low interest rates, and the yield on the 10-year Treasury briefly jumped above 4.55 per cent early Monday morning, up from 4.43 per cent late on Friday. That number shows how much in interest the US government has to pay in order to borrow money for 10 years. But it later regressed to 4.48 per cent as some more calm returned to the market.
The yield on a 30-year Treasury bond briefly leaped above 5 per cent before receding, up from less than 4 per cent in September.
The downgrade by Moody’s comes ahead of a key period for Washington, where it’s set to debate potential cuts in taxes that could suck away more revenue, as well as the nation’s limit on how much it can borrow. And if Washington has to pay more in interest to borrow cash to pay its bills, that could filter out and cause interest rates to rise for US households and businesses too, in everything from mortgage rates to auto loan rates to credit cards. That in turn could slow the economy.
The downgrade adds to a long list of concerns that have already weighed on the market. Chief among them is President Donald Trump’s trade war, which itself has forced investors globally to question whether the US bond market and the US dollar still deserve their reputations as some of the safest places to park cash during a crisis.
The US economy seems to be holding up OK so far despite the pressures of tariffs, but big companies have been warning recently they’re uncertain about the future. Walmart, for example, said recently that it will likely have to raise prices because of tariffs. That caused Trump over the weekend to criticise Walmart and demand it and China “eat the tariffs.”
Walmart’s stock fell 0.2 per cent on Monday.
Other big retailers are on the schedule to report their latest quarterly results this upcoming week, including Target, Home Depot, Lowe’s and TJX Cos.
On the winning end of Wall Street was Novavax, which rose 16.6 per cent after it said US regulators approved its COVID-19 vaccine under some conditions. The approval triggered a $175 million milestone payment under the company’s collaboration agreement with Sanofi.
In stock markets abroad, indexes were mixed amid mostly modest movements across Europe and Asia.
Indexes were close to flat in both Shanghai and Hong Kong after the Chinese government said retail sales rose less in April than expected. Growth in industrial output slowed to 6.1 per cent year-on-year from 7.7 per cent in March.
In the foreign currency markets, the value of the US dollar fell against everything from the euro to the Australian dollar.
AP
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