There were expectations of a sell-off in equities across the globe after credit rating agency Standard & Poor’s revised its outlook on the country’s Triple AAA rating — the highest level — to negative from stable.
While the US markets ended off lows on Monday, Asian markets including india shrugged off S&P’s move and recovered. But worries remain that the real risk may emerge in the medium term and fund flows may turn volatile if US bond yields rise.
Experts say a clear picture will take time to emerge. They say Asian economies will feel little impact from Standard & Poor’s downgrade but a failure by Congress to reach a budget deal could have more serious repercussions.
“The ratings agencies are not always the best guide. They have said there is a possibility of downgrade, so we will have to watch the situation. They may have been cautious at least for now,” said Vallabh Bhansali, co-founder and chairman of Enam Securities.
“It is crucial that the US Congress agrees on a roadmap and timetable for medium-term fiscal consolidation to reassure Asian governments about the stability of their existing investments in US government debt as well as to convince them to continue buying new holdings,” Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight said.
“Given the importance of the US as the world’s largest economy, this is also essential for underpinning the stability of the global financial system.”
Currencies and commodity markets are already seeing a minor churn. The dollar has gained against the Euro overnight since Euro debt concerns are more immediate than US debt concerns. This will mean that the Dollar’s strength could limit gains in emerging currencies.
Commodities like gold and silver however had a good day. They gained overnight being a safe haven investment play. But the dollar’s strength will cap their gains.
Some are even taking a contrarian call.
“The markets had a knee jerk reaction and then recovered as they expect the US govt to take corrective action post this downgrade. And reduce their deficit,” said Sunil Jain, vice-president, equity research, Nirmal Bang Securities.
The U.S. government is projected to run a record $1.5 trillion deficit this year, marking the third straight year that the deficit topped $1 trillion.
While market participants hope that commodities could decline in the medium term, if things don’t improve in the US, that will be positive for the Indian markets. But prolonged weakness in the US will result in outflows from emerging markets. So the markets are not breathing easy just yet.
Read more at: http://profit.ndtv.com/news/show/s-p-cuts-us-debt-outlook-what-is-means-for-markets-dollar-150677?cp