US deficit is a growing threat to global equities: Geoffrey Dennis

The mounting fiscal deficit in the United States poses a long-term risk to global equity markets, according to Geoffrey Dennis, independent emerging markets commentator.“I think it’s a major long-term worry for global equities,” he said in an interview with CNBC-TV18, highlighting rising concerns stemming from ongoing trade tensions, new tariffs, and renewed worries about the country’s debt and fiscal deficit.

While some profit-taking in equities is understandable given the strong rally in US markets, he believes the outlook has shifted in the short term due to Moody’s recent downgrade of the US credit rating, bringing back the narrative of reducing exposure to US assets.

Also Read: Moody’s downgrades US credit rating–a look at earlier revisionsThe US on May 16 lost its top-tier credit status from all major rating agencies for the first time in over a century, after Moody’s Ratings downgraded the government’s credit rating by one notch, highlighting deepening concerns over the nation’s fiscal stability.

Moody’s also warned that the proposed extension of the 2017 Trump-era tax cuts, a current legislative priority for the Republican-led Congress would add an estimated $4 trillion to the federal primary deficit over the next decade, as per Newsweek. The US currently has over $36 trillion in debt.
A key US congressional panel cleared President Trump’s proposed tax cuts on May 18, paving the way for a possible vote in the House of Representatives later this week.Dennis said while India’s macros continue to be strong, it has been less in focus recently as other markets are gaining attention following developments around trade deals.

“I continue to believe that the outlook for India is good, based on the strong economy, albeit possibly slowing, potential for interest rate cuts after that low inflation number for April and obviously a very nice rebound recently in the rupee as well, which probably opens up room for the RBI to cut. And you have got reasonably stable to slightly lower oil prices, all of which is good for India,” he added.

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Gold appears to have continued upside potential, especially if the trend of reducing exposure to US assets persists—largely influenced by fiscal concerns. While not an expert on gold, Dennis sees the environment as favourable for the metal.

He also urges caution when it comes to equities in certain developed markets, suggesting that Europe may be in a relatively stronger position. At the same time, he advises being highly cautious about bonds.

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