Markets all across Asia sank Monday, their first day of trading after the United States lost its top-notch credit rating, providing the first indication of how investors are likely to react to the country’s first-ever credit downgrade.
Hong Kong’s Hang Seng Index took the biggest hit, dropping 4.3 percent shortly after open. Singapore’s Straits Times Index traded down about 1.8 percent on open, while Shanghai’s Stock Exchange Composite Index was down just a modest 0.01 percent on open.
Markets in Japan, Australia and South Korea were each down more than 1 percent in early trading Monday.
The losses in provide the first indication that already-skittish markets may slide lower as a result of the downgrade, which occurred Friday when ratings agency Standard & Poor’s lowered its U.S. credit rating one notch, from the risk-less AAA to AA+.
Over the weekend, there were signs that world markets might deteriorate further on the news. Safe bets, which had been drawing investors away from more risky assets such as stocks, continued to advance.
Spot prices for gold rallied as much as 1.5 percent, to more than $1,688.32 per troy ounce Sunday night, indicating that investors were likely to continue to seek safety in the precious metal.
The dollar also slid against the Japanese yen and the Swiss franc, two currencies that many investors consider safe bets. The dollar was down about 1 percent against the yen, to 77.32 yen per dollar, as of Sunday night and down about 0.7 percent against the Swiss franc, to 0.76 francs per dollar.
Investors had a less optimistic outlook for the U.S. stock market, as futures contracts for two of the top U.S. stock indexes — the Dow Jones industrial average and the Standard & Poor’s 500 — slid more than 2 percent.
In Japan, some analysts point to 1998, when that nation lost its top-notch credit rating, as a template for what might happen in the United States. After ratings agency Moody’s downgraded Japan, the country’s borrowing costs did not increase significantly, said Kazuhiro Takahashi, general manager of investment research at Daiwa Securities in Tokyo. Instead, the Japanese economy experienced something even worse — deflation, or a period of falling prices, which led to stagnated economic growth.
“The same kind of problem should be expected for the U.S. economy, too,” Takahashi said. “Of course, if the U.S. economy, the largest economy in the world, becomes deflationary like Japan, that would have a great impact for the world economy.”
Analysts were predicting a weaker outlook for the United States because of the downgrade.
“The U.S. equity market appears vulnerable to further selling induced by the downgrade, which comes in the wake of downward revisions in the U.S. economic outlook,” analysts at the Royal Bank of Scotland said in a report Sunday night.
The Royal Bank of Scotland also warned of “far-reaching consequences” for U.S. Treasurys, the dollar and risky assets generally as a result of the downgrade. Analysts have been pointing out for weeks that, should the United States be downgraded, it could send the government’s cost of borrowing higher, forcing the Treasury to pay as much as $100 billion in additional interest payments each year.
Analysts will be watching to see how much additional return investors demand from the Treasury on Monday, when trading will resume for U.S. Treasurys. The yield on the Treasury’s 10-year bond had been steadily falling to newer lows for the year, last closing on 2.56. A lower yield indicates that investors are willing to accept a smaller return in exchange for the safety of holding government debt.
That trend could reverse if money market funds that invest only in top-notch securities begin to sell some of their Treasury holdings. Such forced selling could reverse the downward trend in the Treasury’s yield and filter through to various consumer loans, such as mortgages and car loans, because their rates are benchmarked off the Treasury’s borrowing rates.
Investors also will be watching the market for municipal bonds, where the ratings of hundreds of state and local governments that rely on government cash are likely to be reviewed for downgrades next week. Downgrades of their creditworthiness would also provide more forced selling.
And, perhaps most important, investors will be keeping a close eye on the financial sector to see whether banks with large exposures to the Treasury market suffer any loss of investor confidence as a result of the downgrade. A riskier Treasury note could force banks to post additional collateral against loans they have secured with their holdings of Treasuries, although federal banking officials advised Friday that the downgrade should not affect the risk treatment of their Treasury holdings.