Equities are certainly reserving caution so far today and there is a slight bid in bonds as well. In FX, the reaction is rather muted though but perhaps it may take some time for traders and markets to digest what is happening.
In any case, I want to say that the context of the credit rating cut by Fitch also matters. And this isn't a similar story to what we saw when S&P downgraded the US credit rating back in 2011. I would say this time around a downgrade isn't one that is out of the blue, considering the debt limit standoffs that we have seen occurring ever so frequently.
And in that sense, the fact that this latest news isn't that shocking may see markets take to it with a calmer head.
The only gripe perhaps is that some fund houses may have to find a workaround on their portfolio diversification. Typically, they have to hold certain amounts of AAA bonds and now they may have to hide behind semantics or do some adjustments on that.
Adam posted a good recount on the events back in 2011 when the US last got downgraded here. It triggered a chain reaction of risk-off events but keep in mind that at the time, Europe was also not doing well so the panicky reaction may be a bit overstated at the time.
If anything else, I would expect markets to take in the latest Fitch credit rating cut in stride. We're coming off a strong rally in equities so far this year and even if this were to put a dent in that, it would end up being a good dip-buying opportunity. Naturally, you can expect some fear just off the headlines alone but compared to 12 years ago, this is a market that can quickly cast aside any worries within a day.
I also don't expect this to rock the dollar's standing among major currencies, so long as the US economy continues to outshine the rest - which isn't hard as everyone else is doing much worse. So, yes there might be some kneejerk flows to the news but all in all, this question here is still the key macro driver in markets at the moment.
