A pedestrian passes in front of a tube releasing a cloud of steam near the New York Stock Exchange in New Yor, on Monday, Jan. 7, 2019. (Photo: Michael Nagle/Bloomberg) 
An Asia Pacific equity gauge headed for the biggest decline in almost a month. Equities in Hong Kong and mainland China extended losses, while Japanese stocks dropped as a stronger yen dented the outlook for corporate profit.
Some profit taking may be taking place after a broad uptrend in Asian shares following China’s Politburo meeting. Focus appears to be shifting to the effectiveness of the policy support as earlier optimism cools.
Fitch’s rating cut, announced before markets opened in Asia, initially pushed Treasuries higher before the moves stabilised, leaving the two-year yield down one basis point. The yen and the Swiss franc were modestly stronger against the dollar.
“Think it’s just a catalyst for Asia traders to book profits,” said Joshua Crabb, head of Asia Pacific equities at Robeco Hong Kong Ltd., said on the declines in equities. “The market had a really good run in recent sessions. It’s just looking for something to get worried about.”
Investors say Fitch’s US downgrade to AA+ from AAA will do little to deter the top-notch status of US assets over the longer-term, citing a lack of alternatives and the economy’s solid growth. They are also taking cues from what transpired in the wake of a similar event in 2011, when S&P Global Ratings removed the highest rating for the US following an earlier debt-ceiling crisis. While that triggered a selloff in risk assets around the world, it boosted Treasuries as investors sought out havens.
“There’s a few things that do surprise us a little bit in terms of their estimates,” Chris Weston, head of research at Pepperstone Group Ltd., said on the US’s deficit estimates by Fitch on Bloomberg Television. “The absolute downgrade itself won’t and it certainly isn’t going to be something that anyone’s going to liquidate their Treasury holdings on either.”
Contracts for the S&P 500 and Nasdaq 100 were down around 0.5%. The S&P 500 had finished Tuesday with a small loss as the rally that drove the stock market up almost 30% from its October lows took a breather.
The dollar pared declines against most of its G10 peers and several strategists see the current weakness as temporary.
“The USD may ease further in coming sessions if markets consider the rating cut will undermine the USD’s reserve currency status and markets sell their US Treasury bond holdings,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia in Sydney. “But I don’t expect the USD will sustain any losses. Credit ratings are not typically a major medium term driver of currencies.”
Mixed earnings
The latest US data suggested some softening in demand for workers in a still tight US labour market. The numbers weren’t enough to entice investors, who also grappled with a mixed bag of corporate earnings.
Oppenheimer Asset Management’s John Stoltzfus lifted his target on the S&P 500 index, a day after Morgan Stanley’s Michael Wilson, one of the market’s leading doomsayers, sounded less bearish than usual.
Stoltzfus now sees the S&P 500 index hitting 4,900 by the end of the year, leaving room for another 7% gain. The target would mark a new record for the gauge, and one that plays out against bearish predictions by prominent Wall Street names such as Wilson, JPMorgan’s Marko Kolanovic and Bank of America Corp.’s Michael Hartnett.
Elsewhere, oil extended its rally after an industry estimate pointed to a huge drawdown in US inventories, adding to signals the market is tightening. Gold edged higher. DM