US stocks fall on Moody’s downgrade

Wall Street had climbed in regular hours on progress in US-EU tariff talks

A trader works on the floor at the New York Stock Exchange. It has largely been a positive week for global equity markets. Bloomberg

US stocks dropped in late hours after Moody’s Ratings downgraded the US credit score to Aa1 from Aaa on an increase in government debt, a milestone move that casts doubt on the nation’s status as the world’s highest-quality sovereign borrower.

The agency joined Fitch Ratings and S&P Global Ratings in grading the world’s biggest economy below the top, triple-A position. The one-notch cut comes more than a year after Moody’s changed its outlook on the US rating to negative. The credit assessor now has a stable outlook.

“While we recognise the US’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s wrote in a statement.

President Donald Trump's sweeping tax bill failed to clear a key procedural hurdle on Friday, as hardline Republicans demanding deeper spending cuts blocked the measure in a rare political setback for the leader in Congress. The bill would add trillions of dollars to the federal government’s $36.2 trillion in debt over the next decade.

Negotiations will continue through the weekend, with the committee planning to meet again late Sunday night.

Treasury futures slid to session lows after the Moody’s statement, with the market notching its third straight week of losses – the longest slide this year.

Long-term Treasury yields have already been moving higher, with 30-year rates creeping towards 5 per cent as the tax-cut plan adds to investor concerns about the surging debt load. The US deficit has been in excess of 6 per cent of gross domestic product for the past two years.

Before the Moody’s downgrade, Wall Street had climbed in regular hours on Friday following a Financial Times report that the US and the European Union broke an impasse to enable tariff talks.

US stocks delivered their second-best weekly gain of the year on Friday, as Big Tech fuelled a rally that brought the S&P 500 index closer to an all-time high set nearly three months ago.

The Dow Jones Industrial Average rose 0.78 per cent, the S&P 500 was up by 0.7 per cent and the Nasdaq Composite rose 0.52 per cent as investors shrugged off a soft consumer sentiment report.

“US retail sales decelerated significantly, factory production declined for the first time in six months, and confidence among home builders worsened. The only bright spot was the dramatic easing in producer prices: the yearly figure fell from 3.4 per cent to 2.4 per cent, and the monthly number printed a deflationary reading of 0.5 per cent,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

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“Some analysts started saying that the latter numbers point to a slowdown, not stagflation – meaning that the Federal Reserve could lower rates and turn the tables. As such, the US 2-year yield was pulled below the 4 per cent mark and brought the possibility of a July rate cut on to the table.”

A basket tracking the so-called Magnificent Seven stocks including Nvidia, Tesla and Alphabet soared more than 9 per cent this week, its best since late January. For the week, the S&P 500 and Nasdaq 100 have climbed 5.3 per cent and 6.8 per cent, respectively.

It has largely been a positive week for global equity markets, as investors cheered a tariff truce between the US and China that greatly reduces the risk of a global recession. The optimism around trade deals has propelled US stocks ahead of most global equity benchmarks this week.

Money managers were earlier wary about the US equity market and had started to pull away from growth stocks and rotate into defensive names, due to escalating concerns from trade wars to economic growth and geopolitical tensions.

In the first three months of the year, hedge funds boosted positions in health care stocks while reducing exposure in the technology sector.

Markets have calmed after months of turmoil as hopes grow that a tariff war unleashed by President Donald Trump will be less severe than expected and a solid season of corporate earnings draws to a close.

However, Ms Ozkardeskaya said despite the lower recession bets since the US-China de-escalation and the Middle East deals, economic worries for the US will remain.