Sensex, Nifty: Will US rating cut spoil stock market mood?

Most Asian markets were trading lower on Monday morning after Moody's cut rating for long-term issuer and senior unsecured ratings of the United States from AAA to Aa1. The global rating agency cited the increase in government debt and interest payment ratios -- significantly higher than similarly rated sovereigns, as reasons for its US rating cut.  While the initial reaction by the domestic stock market is unlikely to be harsh, a few analysts said one has to keep an eye on the US bond markets for further cues. 

"Indian markets are poised to open cautiously in response to sobering signals from US market futures following the sovereign ratings downgrade, though local small and midcap stocks are expected to maintain their resilience," said Devarsh Vakil, Head of Prime Research at HDFC Securities.

To recall, Moody's is among the last of big rating agencies to lower US ratings. S&P had in 2011 cut its rating for US to AA+, while Fitch Ratings did the same in 2023. "This is a jolt to US markets, though it may not impact it immediately, as Moody’s is the last of the three major credit agencies to maintain a top-tier rating for the US," Vakil, of HDFC Securities.

Vakil said the US would require corrective measures, as a failed or significantly undersubscribed Treasury auction would represent a severe shock to global financial markets in future. Such an event could precipitate a crisis of confidence in US government debt, potentially leading to sharp increases in borrowing costs across the economy and rapid asset repricing in equity and corporate debt markets, he said.

Meanwhile, even as Asian markets fall, the cuts were not severe. South Korea led the decline, slipping 0.90 per cent. Hong Kong, Japan and mainland China also fell up to 0.6 per cent. Gift Nifty was down 70 points, or 0.28 per cent at 25,061, hinting at muted start for the domestic equities. This suggested no major initial impact on domestic market sentiment for now.  

Besides, BofA Securities' recent monthly fund manager survey suggested India has beaten Japan to emerge as the most preferred market in Asia. This is even as the BSE Sensex and the NSE Nifty are up 4 per cent each in the past one month.  

"India emerges as the most favored market, perceived as a likely beneficiary of the supply chain re-alignments following the effects of tariffs. Japan relinquishes the top spot, while China rises to the third spot from the lowest rank in the previous month. Thailand remains the least preferred market," it noted.

BofA noted that growth outlook is exhibiting signs of recovery and Asia ex-Japan return expectations have turned positive on improvement in profit cycle. 

"The market has transitioned into a 'Buy on dips' mode following the index’s breakout above the 23,800–24,000 resistance zone. Last week, Nifty surpassed the 61.8% retracement level of its prior decline, closing at a five-month high. This positive momentum is likely to continue, with an anticipated move towards the 25,800–26,000 zone — a region that aligns with a historical gap and another key retracement level," said Rohan Shah, Technical Analyst at Asit C Mehta Investment Interrmediates.