Higher For Longer US Rates Ringing Asia Alarm Bells

(MENAFN- Asia Times) The broadside Moody's Investors Service just fired at the US dollar and interest rates dramatizes why the next few months could be uniquely chaotic for global markets.

It stands to reason that the one major credit rating company still holding Washington in AAA esteem is anxious to announce a downgrade .

Twelve years after S&P Global downgraded the US, Fitch Ratings last month followed suit. Fitch's move was about more than America's national debt careening toward US$33 trillion.

It was also a response to the“steady deterioration in standards of governance” as politicians play games with raising Washington's statutory debt limit.

Now, Moody's warns that the dysfunction surrounding a government shutdown on October 1, the latest manifestation of extreme polarization, may be the reason to cut Washington's rating to Aa1.

Investors seem way ahead of credit rates as US yields move higher. Rates on 10-year Treasury bonds are at a 16-year high this week, a dubious milestone that's slamming European and Asian markets. Benchmarks from Japan to South Korea to Australia plunged.

On Tuesday alone, MSCI's gauge of global stocks plunged 1.24%, an outsized move for the benchmark. By Wednesday, the index was falling for a ninth day as it approaches its longest losing streak in more than a decade.

The Cboe Volatility Index, Wall Street's so-called fear gauge, flashed its most intense warnings since May, when US inflation hit a 41-year high.

Adding to the disorientation is the dollar's curious durability. The more investors fret about the state of global finance, the more the dollar rises. The yen's move toward 150 to the dollar, a psychologically important level, has markets bracing for currency intervention by Japanese authorities.

The US Federal Reserve, meanwhile, is making it clear it's not done hiking rates. When Minneapolis Fed President Neel Kashkari on Tuesday assigned 40% odds
that rates will still go“meaningfully” higher, traders figure policymakers are telegraphing more austerity to come.

Already, 11 Fed tightening moves in 18 months are working their way through global markets. The specter of more hikes could wreak havoc in debt markets, equity bourses and property sectors everywhere.

Europe is uniquely poorly positioned to withstand the coming financial storm. Rising yields will hit real estate values from Tokyo to Seoul to Bangkok.

A major challenge for Asia is figuring out which financial shoes might drop next as well as how and where the tremors will be felt.

The US government shutdown for which Republican lawmakers are agitating would furlough hundreds of thousands of federal workers and suspend vast swaths of public services, crimping US economic growth.

US House Speaker Kevin McCarthy and his Republican party are angling for a government shutdown. Image: Twitter

“A shutdown would be credit negative for the US sovereign,” Moody's analysts wrote in a note this week. They argue that“it would underscore the weakness of US institutional and governance strength relative to other AAA-rated sovereigns that we have highlighted in recent years.”

In particular, Moody's adds,“it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability.”

Economists at Wells Fargo write that“should a shutdown transpire, there could be a negative impact of the US dollar, albeit one that is likely to be modest and short-lived.”


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