Fitch Ratings Warning Triggers Market Concerns amid US Debt Impasse

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Global markets faced a downward trend on Thursday as fears of a US default intensified due to the ongoing struggle to reach a debt deal, prompting Fitch Ratings to issue a warning about the country's credit rating.

The lack of progress in negotiations on Capitol Hill to raise the US borrowing limit and meet its debt obligations has unsettled investors worldwide, leading to growing apprehension and risk aversion.

While talks between President Joe Biden and Republican House Speaker Kevin McCarthy were described as "productive," little progress has been made, with Republicans advocating for spending cuts and Democrats pushing for a "clean" increase.

Analysts noted that although there is a general expectation of a last-minute agreement, following a period of brinkmanship, investors are becoming increasingly anxious and risk-averse.

Fitch's recent decision to place the country's AAA-ranked credit on "rating watch negative" added to the unease. The ratings agency cited increased political partisanship hindering a resolution on the debt limit before June 1, when the US Treasury Department warned that the government could run out of money, leading to a default.

Economists widely caution that a failure by the United States to meet its financial obligations would have severe economic consequences for both markets and the global economy.

Fitch stated in a press release that it still expects a resolution to the debt limit before the stated deadline. However, the agency acknowledged that risks have heightened, raising concerns that the debt limit may not be raised or suspended on time, potentially resulting in missed payments by the government.

This announcement raises the possibility of the first ratings downgrade since a similar standoff in 2011, which saw S&P downgrade the US credit rating.

Tony Sycamore of IG Australia called Fitch's move "a bit of a slap" to both sides, emphasizing the urgency for them to take action, as their inaction is making ratings agencies and markets increasingly nervous.

The news from Fitch came after another day of selling on Wall Street, causing all three major indexes to close in the red. Asian markets followed suit on Thursday, with Hong Kong experiencing a decline of more than two percent, and Shanghai, Sydney, Seoul, Singapore, Manila, Mumbai, Bangkok, and Jakarta also in negative territory. Tokyo and Taipei showed marginal gains.

London opened lower, Paris remained flat, and Frankfurt saw a slight increase at the opening.

Despite the market concerns, McCarthy expressed hope that an agreement could be reached before June 1, affirming that the US would not default and stating, "We're going to solve this problem."

The White House Press Secretary, Karine Jean-Pierre, echoed the sentiment that talks remain productive and expressed belief in the possibility of a bipartisan and reasonable agreement. She warned of catastrophic impacts throughout the country if a resolution is not reached, including millions of job losses, devastating retirement accounts, and a potential recession.

Additionally, market sentiment was dampened by worries over the possibility of further interest rate hikes by the Federal Reserve. Minutes from the central bank's recent policy meeting revealed a split among officials regarding future actions, with inflation remaining above the two percent target.

While some participants suggested that additional policy firming would likely be necessary due to the slow progress in returning inflation to the target, others noted that further tightening might not be required if the economy evolved according to their current outlook.

The minutes also highlighted the assumption by Fed economists that tight financial conditions could lead to a mild recession later this year, followed by a moderate recovery.

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