FTSE falls as Moody’s cuts U.K’s rating

By: Michael Harris
Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to… read more.
on Oct 19, 2020
  • Moody’s downgraded the United Kingdom’s debt rating to “Aa3” from “Aa2”
  • The U.K’s economy had the sharpest downfall among Group of 20 countries
  • The FTSE 100 index currently trades at 5866.1, which is 0.57% negative on the day

The FTSE 100 index is trading around 0.6% in the red today after Moody’s downgraded the UK’s debt rating amid a rising debt.

Fundamental analysis: Growth “significantly slower” 

The U.S. financial services company Moody’s downgraded the United Kingdom’s debt rating as a result of the huge blow the country’s economy took from the coronavirus pandemic, Brexit and because of no definite plans from the government. 

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The agency cut the rating to “Aa3” from “Aa2,” putting the U.K. on the same page with Belgium and the Czech Republic. It said Britain’s economic growth had been significantly slower and will likely remain that way.

Britain’s economy has seen the worst contraction among Group of 7 (G-7) in the second quarter, with its public debt reaching over 2 trillion pounds and transcending 100% of gross domestic product.

The U.K’s economy had the sharpest downfall among Group of 20 countries because of the level of severity of the coronavirus outbreak and the high risk of future outbreaks.

The reduction of U.K’s rating represents another hit for Boris Johnson’s administration that’s already being criticized by opposition parties and lawmakers in his party for his ways of dealing with the pandemic. More people have died in the U.K. from coronavirus than anywhere else in Europe. 

Moody’s also said if Britain fails to strike an extensive trade deal with the European Union, it would increase the damage dealt by the pandemic.

On Friday, Boris Johnson said there was no reason to keep pursuing the trade negotiations.

“Even if there is a trade deal between the UK and EU by the end of 2020, it will likely be narrow in scope,” Moody’s commented.

It said that the U.K. doesn’t have a budgetary discipline anymore and it’s unlikely that the country will manage to reduce its high debts in a short time. 

“The UK effectively has no fiscal policy anchor,” it added.

Technical analysis: FTSE eyes new multi-month lows

The FTSE 100 index currently trades at 5866.1, which is 0.57% negative on the day. The latest restrictions amid a surging number of cases and Moody’s downgrade have increased a selling pressure on the index. 

FTSE index daily chart (TradingView)

Bulls are now trying to find nearby support, although there’s no significant support line before 5785. A push below 5770 would log new 5-months lows for the index. The descending trend line at 5990 acts as resistance for the buyers. 

Summary

Moody’s cut the U.K’s debt rating as the country is facing immense economic challenges due to coronavirus, Brexit and the government’s response to the crisis. FTSE 100 index tumbled in response, trading 0.6% lower on the day. 

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