US outlook change hits HK, China stocks

PUBLISHED : Wednesday, 20 April, 2011, 12:00am
UPDATED : Wednesday, 20 April, 2011, 12:00am


Stock markets on the mainland and in Hong Kong fell yesterday after rating agency Standard & Poor's cut its outlook on the United States to negative because of signs of political gridlock over plans to deal with the budget deficit and government debt.

Both sides want to cut the deficit, but 'it's very hard to find the middle ground', said Takahira Ogawa, director of sovereign and international public finance ratings at S&P.

'This is the first public warning,' by a Big Three rating agency, said Geoff Lewis, head of investment services at JP Morgan. 'It doesn't affect the outlook. It doesn't affect the numbers. It doesn't affect the analysis. Hopefully, it does affect some of the backwoodsmen in Congress.'

US policymakers have yet to agree on a long-term strategy to reduce the budget deficits or address longer-term fiscal pressures.

S&P said in a report that there is material risk that efforts to reduce future US government budget cuts will fall well below the US$4 trillion and US$4.4 trillion medium-term targets that President Barack Obama and the Republican leaders separately set out earlier this month.

The Obama administration wants to increase taxes by US$1 trillion, mostly on the wealthy, reduce interest costs on Treasury debt by US$1 trillion and reduce federal spending by US$2 trillion over 12 years.

Republicans want to remove US$5.8 trillion in expenditure over the next decade, mainly by cutting education and Medicare and Medicaid expenses, said Ogawa. They also want to cut taxes by US$1.4 trillion.

S&P's US sovereign rating applies to the US$9 trillion in publicly held debt issued by the Treasury outstanding as of February 28. The negative outlook means there is possibility that it would downgrade the rating within two years by no more than one notch to AA-plus, the agency said.

The Hang Seng Index fell 309.69 points, or 1.3 per cent, to 23,520.62 points yesterday. The Shanghai Composite Index dropped 58.28 points, or 1.91 per cent, to 2,999.041. Stocks in the US, Britain, Germany and France also declined after the S&P announcement.

HSBC economist Frederick Neumann said the news was not a surprise. 'The action didn't have an immediate impact on the government bond market. In fact, it rallied. But a US fiscal contraction over the next two years will make it hard for the Federal Reserve to lift interest rates.'