Moody’s cut of US triple-A rating and anticipation over RBA rate decision to weigh on market

Moody’s decision to strip the US of its triple-A credit rating is a red flag for local investors but it’s the Reserve Bank’s rates discussion which is weighing on many.

Futures indicate a 0.1 per cent slide on the ASX 200 when it opens. Picture: Jeremy Piper

Australian shares are poised to slide this morning after Moody’s downgraded the US’s credit rating amid growing concerns about rising government debt levels.

Moody’s decision to strip the US of its triple-A credit rating will raise more red flags with investors and come as a blow to President Donald Trump’s narrative of economic strength and prosperity.

Futures indicated a 0.1 per cent slide on the ASX 200 when it opens, following a 1.4 per cent gain last week.

AMP deputy chief economist Diana Mousina said shares risked falling further given the ongoing tariff war, increased recession risk in the US and the risk of a US/Israeli strike on Iran’s nuclear capability if diplomacy doesn’t work.

“Even if the low has been seen volatility is likely to remain high,” she said.

“But with Trump likely to ultimately back down further on the tariffs … and pivot towards more market-friendly policies like tax cuts and deregulation, and central banks including the RBA likely to cut rates further, shares are likely to recover on a more sustainable basis into year end. But it’s likely to be a rough ride.”

She said Moody’s downgrade was likely to put upward pressure on bond yields and weigh on shares at the start of the week.

AMP deputy chief economist Diana Mousina.

“(But) this is the same rating given by Fitch Ratings and S&P Global Ratings so from that point of view it’s not really new news,” Ms Mousina said.

US bond yields remain elevated around 4.5 per cent for the 10-year Treasuries, as recession expectations have reduced after the latest trade deals and investors expect fewer rate cuts from the Federal Reserve.

“Traders pared back expectations to two more rate cuts (worth 50 basis points) this year, which is reasonable and in line with our own expectation,” Ms Mousina said.

“The first cut is likely in July or September which will probably annoy Trump who called US Fed chair ‘Too Late Powell’.”

In Australia, investor attention will be squarely focused on the Reserve Bank’s rate decision on Tuesday, with economists widely expecting the central bank to cut interest rates. However, sticky inflation and a resilient labour market have tempered some expectations for any dovish tilt in the RBA’s language.

“At the end of the day we expect the central bank to see more downside risks to the economy from not cutting rates, than upside inflation risks from reducing interest rates,” Ms Mousina said. “We expect another 0.25 per cent rate cut in August and potentially another in November.”

The market will also turn its eye to the Victorian state budget on Tuesday and a speech from RBA deputy governor Andrew Hauser on Thursday.

Wall Street finished Friday on a winning note ahead of the Moody’s decision.

The Dow Jones Industrial Average rallied 0.8 per cent, the broadbased S&P 500 gained 0.7 per cent, while the tech-rich Nasdaq Composite Index climbed 0.5 per cent.

Investors largely shrugged off weaker consumer sentiment data that reflect consumers’ “sombre” outlook and expectations of higher inflation.

European markets also closed higher.

Originally published as Moody’s cut of US triple-A rating and anticipation over RBA rate decision to weigh on market