Asian Stocks Slide as Moody’s Downgrade Clouds U.S. Economic Outlook

Asian markets opened the week on a downbeat note as investor sentiment took a hit following Moody’s decision to strip the United States of its last top-tier sovereign credit rating. The move, which came late Sunday, downgraded the U.S. from Aaa to Aa1, citing escalating debt levels and the prospect of even deeper fiscal deficits in the years ahead.

The downgrade dampened optimism that had been building after the U.S. and China reached a temporary agreement to reduce tit-for-tat tariffs, signaling a pause in their prolonged trade war. That deal, which many saw as a relief rally catalyst, was overshadowed by concerns that the ballooning U.S. debt could have long-term implications on global financial stability.

Moody’s explained its decision by pointing to a decade-long increase in federal debt and rising interest payment obligations that have pushed the U.S. far above other similarly rated sovereigns.

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The agency projected the U.S. deficit could climb to nearly 9% of GDP by 2035 — up from 6.4% in the previous year — driven by a combination of growing entitlement spending, higher interest costs, and weak revenue generation.

The announcement rippled across global markets. Stocks fell sharply in Hong Kong and Shanghai after lackluster Chinese retail sales data compounded the negative sentiment. While Chinese factory output showed some strength, it wasn’t enough to buoy confidence.

Elsewhere, markets in Tokyo, Sydney, Seoul, Singapore, Wellington, Taipei, and Jakarta also closed in the red. U.S. stock futures slipped as well, suggesting a rough start to the trading week on Wall Street.

Meanwhile, the U.S. dollar weakened against most major currencies, while gold — often a safe-haven in times of uncertainty — rebounded to $3,225 per ounce.

The downgrade is the third from a major ratings agency over the past decade, following S&P’s move in 2011 and Fitch’s cut in 2023.

Analysts are divided on the significance of Moody’s decision. While some suggest it could increase Treasury yields and raise borrowing costs for the U.S. government, others say the market impact will be limited unless further downgrades follow.

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Ray Attrill of National Australia Bank downplayed the potential fallout, calling Moody’s move a “non-event” for serious investors.

“This will have zero impact on any investor’s willingness to hold U.S. Treasuries,” he noted. Stephen Innes of SPI Asset Management echoed the sentiment, emphasizing that market participants are more focused on upcoming U.S. economic data than on rating changes.

“Moody’s may have dropped the mic,” Innes wrote, “but for equity traders, the real test this week will be Main Street.”

Adding to the pressure on the White House, Congress failed to pass President Donald Trump’s proposed “big, beautiful bill,” which included extensions to tax cuts and tighter welfare restrictions.

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Independent analysts estimate the legislation would have added over $4.8 trillion to the national debt over the next decade. Several Republican lawmakers opposed the bill on fiscal grounds, with Congressman French Hill warning the downgrade was a wake-up call about America’s fiscal trajectory.

U.S. Treasury Secretary Scott Bessent dismissed Moody’s decision, calling it a lagging indicator and blaming the previous administration under President Joe Biden for the fiscal situation. White House communications director Steven Cheung also criticized the agency, specifically targeting Moody’s chief economist Mark Zandi on social media.

As the financial world digests the downgrade, attention is now turning to key retail earnings reports from major U.S. companies such as Target, Home Depot, and Lowe’s.

Investors are hoping the strength of the American consumer — which has underpinned much of the market’s resilience — will continue to provide support as the broader economic picture becomes increasingly complicated.

In the end, while Moody’s downgrade may not immediately shift investor behavior, it underscores growing concern about the sustainability of U.S. fiscal policy and could become a bigger issue if confidence begins to waver further down the road.