Markets across Asia sank Monday, their first day of trading after the United States lost its top-notch credit rating, providing the first indication of how investors are likely to react to the country’s first-ever credit downgrade.
Japan’s Nikkei 225 dropped 2.18 percent, ending the day at 9,097.56 — its lowest closing mark since March 17. Other major indexes sustained even greater losses, with Hong Kong’s Hang Seng falling 2.27 by the early evening and the Shanghai Composite losing 3.79 percent.
South Korea’s Kospi closed down 3.82 percent, at one point nearly falling 7 percent before recovering in the final 90 minutes of trading. The Korea Exchange halted trading for about several minutes Monday amid the steep losses.
Australia’s Standard & Poor’s/ASX 200 was down about 2.9 percent, hitting a two-year low, while the Singapore Straits Times index tumbled nearly 3.1 percent.
The losses provided the first indication that already skittish markets may slide lower as a result of the downgrade, which occurred Friday when ratings agency Standard & Poor’s lowered its U.S. credit rating one notch, from the risk-less AAA to AA+.
Over the weekend, there were signs that world markets might deteriorate further on the news. Safe bets, which had been drawing investors away from more risky assets such as stocks, continued to advance.
Spot prices for gold rallied more than 3 percent, topping $1,700 per troy ounce late for the first time, indicating that investors were likely to continue to seek safety in the precious metal.
The dollar also slid against the Japanese yen and the Swiss franc, two currencies that many investors consider safe bets. The dollar was down about 0.6 percent against the yen, to 77.87 yen per dollar. But it held steady against the Swiss franc.
The slide came despite indications late Sunday by finance ministers from the seven countries with the largest economies that they would take “all necessary measures” to support financial stability, including further intervention in foreign exchange markets.
Kazuhiro Takahashi, general manager of investment research at Daiwa Securities in Tokyo, said the finance ministers’ statement probably blunted the full impact of the U.S. credit downgrade. But he still thinks the fallout is likely to be severe, as evidenced by Japan’s 1998 credit downgrade. After ratings agency Moody’s took away Japan’s top-notch credit rating, the Japanese economy experienced deflation, or a period of falling prices, which led to stagnated economic growth, he said.
“The same kind of problem should be expected for the U.S. economy, too,” Takahashi said. “Of course, if the U.S. economy, the largest economy in the world, becomes deflationary like Japan, that would have a great impact for the world economy.”
For Japan, the second-largest foreign holder of U.S. debt, export-dependent corporations were hit hardest on the markets amid fears of a global economic slowdown. Hitachi shares were down nearly 4.0 percent, and Honda shares slid 3.0 percent. The Nikkei is down 8.7 percent in the past week, adding to the difficulties for an economy still trying to climb back from the March 11 mega-disaster.
Though the latest financial chaos is rooted in the U.S. and Europe, Asian markets could be pinched in a global chain-reaction — with world trade numbers shrinking and major exporters in Japan, China and South Korea sustaining the damage.
During the financial crisis of 2008, Asian countries were relatively unscathed until the collapse of Lehman Brothers. Soon after, world trade volume plummeted. And the financial crisis — known in Japan as “Lehman shock” — hit Asia.
“The channel of contagion was the trade channel, not the financial channel,” said Takatoshi Ito, an economist at the University of Tokyo. “So I think Asia is worried again about the trade channel. That is why [export-dependent] South Korea was down so much.”
Investors had a less optimistic outlook for the U.S. stock market, as futures contracts for two of the top U.S. stock indexes — the Dow Jones industrial average and the Standard & Poor’s 500 — were each down nearly 2 percent late Sunday. Some analysts pinned the weaker outlook on the downgrade.
“The U.S. equity market appears vulnerable to further selling induced by the downgrade, which comes in the wake of downward revisions in the U.S. economic outlook,” analysts at the Royal Bank of Scotland said in a report Sunday night.
The Royal Bank of Scotland also warned of “far-reaching consequences” for U.S. Treasurys, the dollar and risky assets generally as a result of the downgrade.
Analysts will be watching to see how much additional return investors demand from the Treasury on Monday, when trading resumes for Treasurys in the United States. The yield on the Treasury’s 10-year bond had been steadily falling to newer lows for the year, closing at 2.56 Friday. A lower yield indicates that investors are willing to accept a smaller return in exchange for the safety of holding government debt.
That trend could reverse if money market funds that invest only in top-notch securities begin to sell some of their Treasury holdings. Such forced selling could reverse the downward trend in the Treasury’s yield and filter through to various consumer loans, such as mortgages and car loans, because their rates are benchmarked off the Treasury’s borrowing rates.
Investors also will be watching the market for municipal bonds, where the ratings of hundreds of state and local governments that rely on government cash are likely to be reviewed for downgrades next week. Downgrades of their creditworthiness would also provide more forced selling.
And, perhaps most important, investors will be keeping a close eye on the financial sector to see whether banks with large exposures to the Treasury market suffer any loss of investor confidence as a result of the downgrade. A riskier Treasury note could force banks to post additional collateral against loans they have secured with their holdings of Treasuries, although federal banking officials advised Friday that the downgrade should not affect the risk treatment of their Treasury holdings.