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03 Aug

Fitch Ratings downgraded the US credit rating to AA+. A resilient US labor market fuels the dollar

August 3, 2023

By JustMarkets

The US stock indices fell sharply yesterday on the back of strong labor market data and as Fitch Ratings downgraded the US credit rating. At the close of the stock market yesterday, the Dow Jones Index (US30) decreased by 0.98%, while the S&P 500 Index (US500) lost 1.38%. The NASDAQ Technology Index (US100) closed negative by 2.17% yesterday.

Fitch downgraded the US credit rating to AA+ from AAA due to the recent controversy over raising the national debt ceiling, the deteriorating balance of the US government budget, aggressive Fed interest rate hikes, and the continued high probability of recession. A similar situation was in 2011, when there was serious tension around raising the US debt ceiling, and the debt limit was also raised at the last minute. Then Standard & Poor’s downgraded the US credit rating to AA+ from AAA, which remains the same until now. A radical downgrade, of course, will not change much economically, but it is still a strong blow to the image of the US.

Morgan Stanley analysts believe that despite progress in reducing overall inflation, core inflation, which excludes more volatile changes in food and energy prices, the Fed’s preferred measure of inflation, remains far from the 2% target. In addition to inflation, the economy is also currently characterized by a labor market reflecting full employment and economic conditions that are still relatively robust. These factors mean that while investors may think the Fed’s tightening cycle is largely over, policymakers may remain committed to higher interest rates for the longer term.

Equity markets in Europe fell yesterday. Germany’s DAX (DE40) decreased by 1.36%, France’s CAC 40 (FR40) fell by 1.26%, Spain’s IBEX 35 (ES35) was down by 1.83%, and the UK’s FTSE 100 (UK100) closed negative by 1.36%.

Switzerland will release inflation data today. While the inflation picture in Switzerland looks rosy, the Swiss National Bank (SNB) is expected to raise the interest rate again at its September 21 meeting. The SNB is concerned that inflation could reverse direction and rise to 2% by the end of the year due to higher service sector inflation and higher mortgage costs.

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On Wednesday, crude oil prices fell more than 2%. What’s interesting is that the drop came on a day when the Energy Information Administration reported a record decline in weekly US crude oil inventories. Normally, a decline in inventories leads to a rise in quotes, but amid a stronger dollar, oil is correcting.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) fell by 2.30%, China’s FTSE China A50 (CHA50) fell by 1.04%, Hong Kong’s Hang Seng (HK50) declined by 2.47% on Wednesday, and Australia’s S&P/ASX 200 (AU200) was negative by 1.29% on the day. Despite analysts downplaying the direct impact of the US downgrade, the move did trigger a wave of selling on global stock markets as investors began to take profits after strong gains in June and July. At the same time, the resilience of the US economy, especially in the labor market, gives the Federal Reserve more room to further raise interest rates, which does not bode well for risk-oriented stock markets.

S&P 500 (F)(US500) 4,513.37  −63.36  (-1.38%)

Dow Jones (US30) 35,282.82  −347.86 (−0.98%)

DAX (DE40)  16,020.02  −220.38  (−1.36%)

FTSE 100 (UK100) 7,561.63 −104.64 (-1.36%)

USD Index  102.61 +0.31 (+0.30%)

Important events for today:
  • – Japan Services PMI (m/m) at 03:30 (GMT+3);
  • – Australia Trade Balance (m/m) at 04:30 (GMT+3);
  • – Switzerland Consumer Price Index (m/m) at 09:30 (GMT+3);
  • – German Services PMI (m/m) at 10:55 (GMT+3);
  • – Eurozone Services PMI (m/m) at 11:00 (GMT+3);
  • – UK Services PMI (m/m) at 11:30 (GMT+3);
  • – Eurozone Producer Price Index (m/m) at 12:00 (GMT+3);
  • – UK BoE Interest Rate Decision (m/m) at 14:00 (GMT+3);
  • – UK BoE Monetary Policy Statement (m/m) at 14:00 (GMT+3);
  • – UK BoE Gov Bailey Speaks at 14:30 (GMT+3);
  • – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
  • – US ISM Services PMI (m/m) at 17:00 (GMT+3);
  • – US Natural Gas Storage (w/w) at 17:30 (GMT+3).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.


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