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US markets braced for S&P downgrade fallout

Investors in the US are braced for a tough day of trading after the US’s credit rating was downgraded on Friday to AA+ by ratings agency Standard & Poor’s

The downgrading is the first time in the country’s history it has lost an AAA rating amid concerns that the US is continuing to struggle in its attempts to tackle its growing debt problems.

Markets in the Far East reacted badly to the news with Japan’s Nikkei 225 falling 2.18 per cent by close and the Chinese Shanghai Composite index fell 3.77 per cent. On Saturday, Saudi stocks fell by 5.5 per cent. After a tumultuous week where it fell by almost 10 per cent, the FTSE fell by 1.5 per cent at 11.10am. Analysts have suggested that US investors will seek out less risky assets, like gold, in the wake of falling share prices.

However, the downgrade does not seem to have undermined US Treasury bonds position as a safe haven. Yields on 10 year Treasury bonds fell to 2.5 per cent in late Asian trading, down from 2.56 per cent on Friday. Shorter term yields also fell with the yield for a two-year Treasury note falling from 0.29 per cent on Friday to a record low of 0.26 per cent.

China turned the screw on America on Saturday in a commentary on the official Xinhua news agency urging it to apply “common sense” to “cure its addiction to debts”. It says as the “largest creditor to the world’s sole superpower [it] has every right to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets”.

S&P downgraded the American credit rating from AAA to AA+ on Friday night deeming the debt deal struck on Capitol Hill last week as falling short of that necessary to stabilise debt in the medium term. The agency added that it is “pessimistic” US policy making and political institutions, left “weakened” by brinkmanship between Democrats and Republicans over the deal can actually apply what was in it to the economy.

On Friday Moody’s Investors Services confirmed its AAA rating for US bonds, but cuts its ratings outlook from “stable” to “negative”.

It came after a week where the Dow Jones fell 4.3 per cent on Thursday, the biggest drop since crisis struck 2008 and the benchmark S&P500 index fell 6.5 per cent, the biggest for two years. The same day, £50bn was wiped off the FTSE 100 which shrunk by 9.7 per cent in five days.

The downgrade has split political opinion in the US: Nobel prize winning economist Paul Krugman says S&P is unqualified to judge, echoing complaints from the White House after the ratings agency made an error calculating the increase in America’s debt over the next 10 year, arriving at $22trn and not $20trn. Possible Republican Presidential candidate Mitt Romney says the lost AAA rating is the latest casualty in US President Barack Obama’s failed economic record. 

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