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Shares to tumble after US rating cut

Shares are primed for another big fall when financial markets open tomorrow morning, but this is likely to be the only major immediate local impact, economists say.

Shares are primed for another big fall when financial markets open tomorrow morning, but this is likely to be the only major immediate local impact, economists say.

SHARES are primed for another big fall when financial markets open tomorrow morning, but this is likely to be the only major immediate local impact from the historic downgrade of US sovereign debt, economists say.

They argue that the move by credit ratings agency Standard & Poor's will have little direct impact on the Australian economy and our biggest trading partner China, even though it will potentially make it slightly more difficult for the US government to pay down its colossal debt and so delay the US economic recovery.

Economists say the move will impact financial markets and may also cause the greenback to weaken - but that this is likely to be short-term.

Local shares finished a tumultuous week down 7.2 per cent on Friday and were expected to open flat tomorrow after a roller-coaster ride on Wall Street on Friday left US stocks slightly lower.

The US sharemarket stabilisation came on the back of stronger-than-expected US jobs news and some positive moves in resolving the sovereign debt debacle in Europe.

The S&P downgrade of US long-term sovereign debt rating from AAA to AA with negative outlook scuppers any chance of a possible relief rally for local shares, economists say. AMP Capital Investors head of investment strategy Shane Oliver says Australian shares will fall tomorrow in anticipation of the action on Wall Street. ''While the move to downgrade US debt is in many ways not unexpected - S&P has been flagging this for a while now ? this downgrade just adds to the uncertainty hanging over the US,'' Dr Oliver said.

Deutsche Bank chief economist Adam Boyton says the move highlights the issue of sovereign risk and the enormous government debt levels in the US and big chunks of Europe. ''But the US downgrade was much more to do with the political difficulty of the debt ceiling negotiations rather than any near-term issue, and that's why I think the focus on the economic growth prospects in the US will outweigh any increase in US yields due to the downgrade,'' Mr Boyton said.

CommSec chief economist Craig James says US policymakers have shot themselves in the foot by their public bickering. ''I am expecting another fall of maybe 1 to 2 per cent in sharemarkets on the back of it,'' he says. ''In a lot of ways it doesn't make any sense - our credit rating hasn't changed our economic outlook hasn't changed ? but shares will fall because investors still treat the US as the centre of the universe.

''Perhaps the best thing that will come out of it will be that it's a big wake-up call for policymakers and politicians in the US to ? start making decisions for the benefit of their country as a whole.''

Traditionally, a ratings downgrade makes a country's debt more expensive, but Deutsche's Mr Boyton says market forces will prevail in relation to US treasuries, which are still regarded as the world's safest haven despite the loss of the top credit rating.

AMP Capital's Dr Oliver said China, the biggest holder of US treasuries, would be relatively unaffected. ''China will probably jump up and down a bit and say the US government is taking a risk with the Chinese people's investments in the US ? but they don't really have a choice - they've got to keep buying US debt to subsidise the US government and US consumers' purchase of Chinese goods.''


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