San Francisco Frontiers - Stock markets slump after US ratings downgrade

The ratings agency downgraded the United States' top-notch credit rating by a step late Tuesday, citing a growing federal debt burden and an "erosion of governance" that has manifested in debt-limit standoffs.

The decision to downgrade the US from AAA to AA+ sparked a fiery rebuttal from the White House.

Wall Street's main indices moved lower, but the losses were not outsized.

The blue-chip Dow shed 0.7 percent in late morning trading. The broader S&P 500 gave up 1.2 percent and the tech-heavy Nasdaq fell 2.0 percent.

Europe's main markets closed with losses of more than one percent.

"Market participants were already contending with the nagging notion that the stock market was overbought on a short-term basis and due for a pullback," said market analyst Patrick O'Hare at Briefing.com.

"It didn't necessarily need another excuse to continue with a consolidation trade, yet Fitch Ratings provided one after Tuesday's close when it downgraded its US credit rating to AA+ from AAA."

Ratings downgrades often mean it becomes more expensive for a government to borrow, but the status of US government bonds, or Treasuries, as a highly liquid safe-haven asset actually saw their yield dip immediately after the announcement.

The yield on 10-year bonds rose in trading on Wednesday, which traders said was more due to expectation of higher volume of US borrowing than the Fitch downgrade.

- Downgrade 'changes little' -

Stephen Innes, managing partner at SPI Asset Management, said the "downgrade will unlikely cause a significant Treasuries sell-off or prompt a major shift in investor behaviour mainly because investors experienced a similar downgrade from S&P in 2011 and came away unscathed."

Michael Hewson, chief market analyst at CMC Markets UK, agreed the impact would be minimal.

"The loss of the AAA rating is damaging from a political point of view, but it changes little in the wider scheme of things when it comes to the investability of the US relative to its peers," he said.

"It’s not as if China, or any other country in Europe is any safer when it comes to investability, as well as political stability."

The US dollar rose against the euro and pound, and was unchanged against the yen.

The downgrade follows a long, drawn-out row between Republicans and Democrats earlier this year over raising the US borrowing ceiling, which had fuelled fears of a devastating default by the world's top economy.

While a deal was eventually struck, the saga rattled markets and reinforced the sense of long-running deadlock on Capitol Hill that has seen the gears of government jammed up.

Though the lifting of the US debt ceiling -- a limit on government borrowing to pay for bills already incurred -- was once routine, it has for several years become a contentious partisan issue.

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 for the United States.

There was some good news about the US economy however. Payroll firm ADP said hiring in the US private sector was slowing in July but coming in at nearly twice as high as analysts expected.

At the same time, wage gains slowed, which will likely reassure the US Federal Reserve which is worried that higher incomes could fuel inflation.

- Key figures around 1530 GMT -

New York - Dow: DOWN 0.7 percent at 35,393 points

London - FTSE 100: DOWN 1.4 percent at 7,561.63 (closed)

Frankfurt - DAX: DOWN 1.4 percent at 16,020.02 (closed)

Paris - CAC 40: DOWN 1.3 percent at 7,312.84 (closed)

EURO STOXX 50: DOWN 1.6 percent at 4,336.50 (closed)

Tokyo - Nikkei 225: DOWN 2.3 percent at 32,707.69 (close)

Hong Kong - Hang Seng Index: DOWN 2.5 percent at 19,517.38 (close)

Shanghai - Composite: DOWN 0.9 percent at 3,261.69 (close)

Euro/dollar: DOWN at $1.0938 from $1.0985 on Tuesday

Pound/dollar: DOWN at $1.2706 from $1.2776

Euro/pound: UP at 86.09 from 85.96 pence

Dollar/yen: UNCHANGED 143.34 yen

Brent North Sea crude: DOWN 2.2 percent at $83.08 per barrel

West Texas Intermediate: DOWN 2.5 percent at $79.34 per barrel

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H.Davis--SFF