While markets have largely shaken off their initial fears about the impact of erratic U.S. trade policy, the risks remain tilted to the downside, Fitch Ratings says.
In a report Thursday, the rating agency noted that capital markets and economic data have proven resilient in the face of extreme U.S. tariff threats and ongoing geopolitical conflicts, which initially sparked a rapid drop in market valuations and unwinding credit spreads. Markets ultimately recovered as the U.S. repeatedly backed off its threats.
“The pause on U.S. tariffs announced in April, the quick resolution to geopolitical conflicts and the continued willingness of U.S. consumers to spend have kept investor risk appetite buoyed and market liquidity high, despite the elevated uncertainty and risk environment,” it noted.
However, the risks to global credit conditions remain tilted to the downside, Fitch said, “with significant uncertainties from a cyclical economic slowdown, a mercurial U.S. tariff policy and persistent geopolitical risks.”
Fitch noted that its mid-year revisions to the outlook for various sectors reflect its “worsening expectations for the operating and business environment.”
As a result, the share of credit outlooks that are “deteriorating” have risen from just 10% at the start of the year to 29% at mid-year, it noted.
Additionally, the weaker U.S. dollar, particularly against the Euro, is pointing to expectations of weaker U.S. growth, Fitch said.