Warning from S&P rattles markets

Photo / Kenny Rodger

A warning to the US Government from ratings agency Standard and Poor's sent ripples through the world's financial markets, hitting both the New Zealand dollar and the sharemarket.

For the first time, Standard & Poor's lowered its long-term outlook for the US federal Government's fiscal health from "stable" to "negative", and warned of serious consequences if lawmakers fail to reach a deal to control the federal deficit.

The agency put the US Government on notice that it risks losing its AAA credit rating unless policymakers agree on a plan by 2013 to reduce budget deficits and the national debt.

"If we get down to a point where the US has its debt downgraded, the deflationary effects will be felt globally," said Tim Schroeders, who helps manage about US$1 billion at Pengana Capital in Melbourne.

"A lot of credit is priced off US-denominated debt and those effects will be felt around the world."

New Zealand's benchmark NZX-50 index ended 25.19 points (0.7 per cent) down at 3439.98, while the New Zealand dollar finished local trade at US78.44c, having hit a three-year high of around US80c early on Monday.

Australia's ASX 2000 index fared far worse, dropping 1.4 per cent by close of the trading day. Forsyth Barr sharebroker David Price said the S&P announcement helped take some heat out of several markets around the world, including the local market.

"If you look at the US, it has had its biggest first quarter for 13 years, so the markets have been doing quite well in the face of adversity in different places," he said.

The NZX-50 index has gained about 4 per cent so far this year, even after yesterday's fall. "The downgrade gave the market an excuse to take a bit of a breather," he said.

Asian stocks dropped, sending the region's benchmark index to its longest losing streak in five weeks, while the yen rose for a fourth day. The MSCI Asia Pacific Index sank 1.2 per cent in late Tokyo trading, declining for a third day.

Japanese exporters led declines, extending a global slump in stock markets, after the S&P announcement. Japan's Nikkei index closed down 1.2 per cent.

America's S&P 500 tumbled 1.1 per cent, its steepest loss since March 16, while yields on 10-year Treasuries were little changed at 3.38 per cent. The Dow Jones also fell 1.1 per cent.

Kevin Morgan, a dealer at OM Financial New Zealand, a foreign currency, futures and options brokerage, said the local market fallout was not as dramatic.

He said the US dollar weakened quite sharply and the euro, which has its own sovereign debt problems, also fell. Declines in the two major currencies combined to create a climate of risk aversion, which helped drag the kiwi down.

The weak US dollar should have in theory meant a gain for the kiwi "but I think overall the kiwi is coming back because it got too high", he said, pointing to the local currency's 12 per cent gain over the past month.

The New Zealand dollar started the week at US80c - a three-year high, dropping initially to US79.10c, rebounding to US79.60c, before dropping to US78.44c. But Morgan expected the kiwi and aussie to remain well-supported due to strength in commodities markets.

- Additional reporting: Bloomberg