NEW YORK, Aug 3 — Global stock markets slumped yesterday after Fitch stripped the United States of its top credit rating, citing a growing federal debt burden and an "erosion of governance.”

Fitch’s decision Tuesday night to downgrade the United States from AAA to AA+ sparked a fiery rebuttal from the Biden administration.

Treasury Secretary Janet Yellen characterised Fitch’s move as "entirely unwarranted,” calling it "puzzling in light of the economic strength we see in the United States.”

Wall Street’s main indices moved lower, with the S&P 500 finishing down 1.4 per cent.

Europe’s main markets closed with losses of more than 1 per cent.

"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 later rose in trading yesterday, which traders said was more due to expectations of higher volumes of US borrowing than the Fitch downgrade.

Downgrade ‘changes little’

Stephen Innes, managing partner at SPI Asset Management, said the downgrade will be "unlikely” to "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 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.

In an interview with CNBC, Fitch Ratings senior director Richard Francis pointed to a "pretty steady deterioration in governance over the last couple of decades” in the United States.

Among the elements he highlighted was January 6, referring to the date in 2021 when supporters of Donald Trump stormed Congress in a bid to prevent certification of his rival Joe Biden’s election victory.

Other factors, he added, included "constant brinksmanship surrounding the debt ceiling” along with Republicans and Democrats’ inability to generate "meaningful, long-term solutions” on fiscal issues surrounding programs like social security and Medicare.

Key figures around 2050 GMT

New York - Dow: DOWN 1.0 per cent at 35,282.52 (close)

New York - S&P 500: DOWN 1.4 per cent at 4,513.39 (close)

New York - Nasdaq: DOWN 2.2 per cent at 13,973.45 (close)

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

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

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

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

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

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

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

Euro/dollar: DOWN at US$1.0940 from US$1.0984 on Tuesday

Pound/dollar: DOWN at US$1.2711 from US$1.2777

Euro/pound: UP at 86.04 from 85.97 pence

Dollar/yen: UP at ¥143.37 from ¥143.34

Brent North Sea crude: DOWN 2.0 per cent at US$83.20 per barrel

West Texas Intermediate: DOWN 2.3 per cent at US$79.49 per barrel

— AFP