Asian markets hit three-week low on shock US downgrade

Photo: Reuters

Unresolved budget crisis blamed with possible US debt default feared as soon as early July

RON DERBY

Published: 2011/04/19 06:37:48 AM

TOKYO stocks hit a three-week low on Tuesday after chipmaker Texas Instruments warned the impact from Japan’s earthquake last month would result in slower sales growth and after the yen climbed on S&P’s threat to cut the US credit rating.




Yesterday bourses around the world took a beating and the JSE was no exception, sliding to near three-week lows in the biggest percentage fall in more than a month.


Gold rose and oil fell.




The downgrade fuelled negative sentiment in markets already concerned about the European debt crisis and rising inflation in emerging markets.


The euro, which has remained strong through the latest bout of turbulence, fell to its lowest against the dollar in 10 days.








"The (US) revision has come as a major surprise," Manoj Ladwa, senior trader at London-based ETX Capital, said yesterday.


"Although there have been rumblings in the market for a little while now, this move is a shock and we could see other agencies follow suit."


S&P put a "negative" outlook on the AAA credit rating of the US due to the "material risk" legislators would fail to deal with rising budget deficits and debt. If a deal was not reached, and meaningful efforts to address budgetary challenges not started, "this would in our view render the US fiscal profile meaningfully weaker than that of peer AAA sovereigns", the ratings agency said yesterday.


S&P assigned a one-in-three chance it would lower the US’s rating in the next two years.


The US Treasury projected that its government might reach the $14,3-trillion debt ceiling limit by mid-May and run out of options for avoiding default by early July.


This "has sent shivers down traders’ spines", Andrew Todd, an equity derivatives trader at Imara SP Reid, said yesterday. "The selling has been broad-based, it’s really across the board."


The JSE all share index dropped 2,6% to 31388,63 yesterday — its biggest fall since March 10, and the lowest level since the end of that month. US and European stocks also dropped.


The weakness may "follow on to Asia, and we can expect further weakness", Mr Todd said.


Heavyweights Anglo American and BHP Billiton dragged the JSE lower, with copper falling as much as 2,1% in London. The metal is geared to emerging markets as it is used widely in building and manufacturing. Steel producers ArcelorMittal SA and Evraz Highveld Steel were down 5,2% and 5% respectively.


A recovery in the US market was important for world gross domestic product, Mr Todd said.


The effect of US debt concern was worsened by speculation that Greece may need to restructure its debt. "Debt concerns were largely brushed aside by markets, but the issue is not going to go away overnight," Doug Blatch, head of equity and derivative trading at Investec Asset Management, said yesterday. China — the world’s second-biggest economy — is wrestling inflation caused by a $2,7-trillion two-year credit boom. Inflation rose to its fastest pace in 32 months in March.


Rising prices were a problem in much of the developing world, Mr Blatch said. Emerging market economies could hike interest rates in response to inflation, derailing recovery.


The rand weakened 1,1% against the dollar yesterday to R6,87 — its lowest since March 23. "The dollar actually gains in times of stress in the US, but the rand hasn’t reacted as badly as its peers," John Cairns, currency strategist at Rand Merchant Bank , said yesterday. With Bloomberg


derbyr@bdfm.co.za