Stocks drop as US credit downgrade jolts market

MANILA, Philippines — Global markets followed Wall Street lower as the wind came out of the latest rally, with traders jolted by the downgrade of US sovereign debt, soft economic data and concerns about elevated valuations.

However, high hopes that the US Federal Reserve was at or near the end of its interest rate hiking cycle and a still-resilient economy meant the mood on trading floors remained broadly upbeat, analysts said.

The benchmark Philippine Stock Exchange index or PSEi slipped below the 6,500 mark yesterday, closing at a three-week low of 6,483.28, down by 110.52 points or 1.68 percent.

The broader All Shares index, meanwhile, fell to 3,463.86, down by 52.09 points or 1.48 percent.

Total value turnover reached P4.225 billion. Market breadth was heavily negative, 154 to 27, while 47 issues were unchanged.

Investors shifted away from riskier investments after Fitch cut the US debt rating by one notch from its AAA level, citing a growing federal debt burden and an “erosion of governance” that has manifested in debt limit standoffs.

The downgrade is the first by a major ratings company since a similar debt impasse in 2011 saw S&P lower its top-notch classification.

White House press secretary Karine Jean-Pierre said the move “defies reality,” while Treasury Secretary Janet Yellen said in a statement that she “strongly” disagreed with Fitch, calling the change “arbitrary and based on outdated data.”

The announcement meant it would be more expensive for the government to borrow. However, the risk-off sentiment sent traders rushing to safe assets, such as Treasuries, as well as the yen.

Chang Wei Liang, at DBS Bank, said: “High inflation and growth remain the key triggers for Treasury selling, with credit ratings shifts largely mitigated by the substantial stock of US private wealth, and a correspondingly large safe haven demand for US Treasuries.”

Earlier, all three main Wall Street indexes had dropped after news that US factory activity shrunk in July for the ninth consecutive month, hinting at softness in the economy.

Profit-taking added to the selling following a recent run-up fuelled by optimism that the Fed’s rate hike last week would be its last thanks to an easing of inflation pressure.