03 Aug

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

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.

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.

Economics & Fundamentals Financial News
03 Aug

Sterling under pressure ahead of BoE decision

By ForexTime 

Sterling is getting no love ahead of the highly anticipated Bank of England (BoE) rate decision today.

As discussed in our “trade of the week”, the BoE is widely expected to raise interest rates by 25 basis points. However, traders have not fully ruled out a surprise 50bps hike in the face of sticky inflation. In fact, markets are pricing in a 24% probability of such a move – something that could spark explosive levels of volatility on the pound if this becomes reality. But signs of cooling economic growth and recession fears could make this a tough decision for the central bank.

While today’s expected hike will mark the 14th consecutive increase since December 2021, investors will be seeking clarity on what to expect in September and beyond. The quarterly Monetary Policy Report (MPR) and BoE Governor Andrew Bailey’s press conference may offer fresh clues on the BoE’s next policy move.

Focusing on the technical picture…

Bears have taken over the reins from the bulls on the GBPUSD currency pair.

On the daily charts, the bearish intent was made crystal clear when a lower top occurred on 27 July at 1.29959. Bears then proceeded to break through a weekly support level, forming a lower bottom in the process on 28 July at 1.27630. After a short but weak bullish reaction, bears followed through with a more prominent break, and the weekly support level turned into a resistance level in the process.

The declining slope of the MACD (Moving Average Convergence Divergence) oscillator and the 50 EMA that broke to the downside shortly after, provided further confirmation that the selling pressure was on the increase.

When the lower bottom at 1.27630 was breached on 1 Aug with a beautiful Evening Star Candle pattern occurring as well, two targets were possible from there. Attaching the target guideline ( A customized Fibonacci tool) to the lower bottom at 1.27630 and dragging it to a lower top at 1.29959, the following targets were established:

• The first potential target at 1.25068 if there is enough bearish momentum to reach the next weekly support level.

• The second price target is likely at 1.21575 if the bears can keep up their rein to the weekly support level at 1.20876.

If the lower top that formed on 27 July at 1.29959 is broken, this scenario is no longer valid, and any open risk must be managed tightly. 

As long as the bears keep on making lower tops and bottoms, the market sentiment for GBPUSD on the D1 time frame will remain bearish.

Forex-Time-LogoArticle by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Economics & Fundamentals Financial News
03 Aug

To fight financial illiteracy, we mapped our money system as waterworks

By Martijn Jeroen van der Linden, Hague University of Applied Sciences 

Over the past decade, the super-rich and large corporations have been able to borrow at record low interest rates. This influx of easy money has shored up markets for yacht-backed-loans and securities, dividends, share buy-backs, and merger and acquisition deals.

Meanwhile, those not deemed “creditworthy” find themselves barred from credit, the powerless witnesses of ever surging rents and living costs. Time and again, the financial sector has flooded certain parts of the economy while other parts remained parched. The question is: Why is it so hard to fix the money system?

Two parts of financial literacy

Lack of financial literacy among most citizens is at least one of the causes – though there are competing definitions of the latter. On 7 June, the European Commission (EC) lamented that “levels of financial literacy in the EU are too low”, posing a threat to “personal and financial well-being, households and society more broadly.”

However, here the institution takes a rather narrow view of financial education, limited to personal finance – i.e., teaching people how to manage budgets, achieve saving goals, and understand different financial products. Earlier in March, Sigrid Kaag, the Dutch Minister of Finance, echoed a similarly minimalist view of financial literacy: “By practising how to save, plan and make choices from a young age onwards, children learn how to make sound financial decisions.”

The other view of financial literacy, which we support, entails a far more ambitious understanding of the money system. We call it systemic financial literacy. “In the age of the CDS and CDO, most of us are financial illiterates”, wrote US financial journalist Matt Taibbi in 2009, referring to the complex financial products that triggered the Great Recession. Fast forward fourteen years later, and most of us remain unfamiliar with the jargon of economists, bankers and tax experts. As in 2009, today’s democracies continue to be divided into what Taibbi describes as a “two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.”

With this in mind, we believe any project seeking to boost financial literacy ought to educate us on the roles of a central bank, but also payment infrastructure, the tax regime, and the investment of our pension savings. A number of questions ought to be raised, too, to this end: What do we consider public utilities? Which financial services can better be assigned to private companies? Who gets the power to create and allocate new money – and for what purposes? To answer these big questions requires not only a deeper understanding of the structures of finance, but continuous political engagement.

The waterworks

Together with cartographer Carlijn Kingma and investigative financial journalist Thomas Bollen, we sought to create a project that would inspire such questions and demystify the world of finance. For two and half years, we developed the “waterworks of money”, an architectural visualisation of our money system that bypasses the economic jargon.

Kingma spent 2,300 hours drawing this map by hand, based on in-depth research and interviews with more than 100 experts – from central bank governors and board members of pension funds and banks to politicians and monetary activists. In an animated video, we walk you through a metaphorical representation of our money system, its hidden power made manifest.

What do we water?

The metaphor of water was critical to the design of our map. Indeed, the financial sector is to the economy what an irrigation system is for farming lands. Just as irrigation helps crops grow, money allows the economy to flourish.

The architecture of our financial irrigation system and the way the sluices and floodgates are operated impacts us all. “What do we water, and what goes dry?” Kaag asked economists, bankers and reporters in June 2022. “Choices made by the financial sector determine what grows and what dies off. That’s where banks, pension funds, asset managers, and insurance firms can make a difference,” she said.

‘The Waterworks of Money’, an architectural map of the money system drawn by cartographer Carlijn Kingma.
Fourni par l’auteur

In our map, the long and complex process of financial irrigation starts at the top of the so-called tower of society, where big money keeps their reservoirs. The world’s largest companies, including big oil, big pharma and big retail, are lodged there. Open the floodgates and money flows downstream, setting the wheels of industry in motion. Salaries make their way through the waterworks, and trickle down into employee piggy banks. In return, everyone goes to work.

Money eventually seeps down into the lowest ranks of society, where the conveyor belt is always running, products are assembled and raw materials, mined. People then spend the wages they’ve earned, often in shops and businesses. Sale revenues get pumped up to the reservoir at the top, and the cycle starts all over again. Or at least, that is the idea.

In reality, trickle-down economics popularised by US president Ronald Reagan and UK prime minister Margaret Thatcher, does not take place. Money circulates mainly between the top of the tower and the financial sector. Moreover, the huge growth of the financial sector over the last decades has dug the gap between the haves and have-nots deeper. The growing quantity of money is driving up share prices, house prices and management fees, but most of the money does not reach the everyday economy in the tower of society – where it can be used for productive investments, generates income and add social value.

The structure of our money system is not a natural phenomenon. The way the waterworks are put together is a political choice. In democracies, higher levels of systemic financial literacy are a prerequisite to change this architecture and make the financial sector serve society better.

This article was co-written with investigative financial journalist Thomas Bollen and cartographer Carlijn Kingma.The Conversation

Martijn Jeroen van der Linden, Professor of Practice in New Finance, Hague University of Applied Sciences

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Opinions
02 Aug

Rate hikes may have slowed inflation in the US – but they have also heightened the risk of financial crises for lower-income nations

By Cristina Bodea, Michigan State University 

The campaign to fight U.S. inflation by upping interest rates has been going on for a year and a half – and its impacts are being felt around the world.

On July 26, 2023, the Federal Reserve announced another quarter-point hike. That means U.S. rates have now gone up 5.25 percentage points over the past 18 months. While inflation is now coming down in the U.S., the aggressive monetary policy may also be having significant longer-term impact on countries across the world, especially in developing countries. And that isn’t good.

I study how economic phenomena such as banking crises, periods of high inflation and soaring rates affect countries around the world and believe this prolonged period of higher U.S. interest rates has increased the risk of economic and social instability, especially in lower-income nations.

Ripples around the world

Monetary policy decisions in the U.S., such as raising interest rates, have a ripple effect in low-income countries – not least because of the central role of the dollar in the global economy. Many emerging economies rely on the dollar for trade, and most borrow in the U.S. dollar – all at rates influenced by the Federal Reserve. And when U.S. interest rates go up, many countries – and especially developing ones – tend to follow suit.

This is largely out of concern for currency depreciation. Raising U.S. interest rates has the effect of making American government and corporate bonds look more attractive to investors. The result is footloose foreign capital flows out of emerging markets that are deemed riskier. This pushes down the currencies of those nations and prompts governments in lower-income nations to scramble to mirror U.S. Federal Reserve policy. The problem is, many of these countries already have high interest rates, and further hikes limit how much governments can lend to expand their own economies – heightening the risk of recession.

Then there is the impact that raising rates in the U.S. has had on countries with large debts. When rates were lower, a lot of lower-income nations took on high levels of international debt to offset the financial impact of the COVID-19 pandemic and then later the effect of higher prices caused by war in Ukraine. But the rising cost of borrowing makes it more difficult for governments to cover repayments that are coming due now. This condition, called “debt distress,” is affecting an increasing number of countries. Writing in May 2023, when he was still president of the World Bank, David Malpass estimated that some 60% of lower-income countries are in or high risk of entering debt distress.

More broadly, any attempt to slow down growth to lower inflation in the U.S. – which is the intended aim of raising interest rates – will have a knock-on effect on the economies of smaller nations. As borrowing costs in the U.S. increase, businesses and consumers will find themselves with less cheap money for all goods – domestic or international. Meanwhile, any fears that the Fed has pulled on the brakes too quickly and is risking recession will suppress consumer spending further.

The risk of spillover

This isn’t just theory – history has shown that in practice it is true.

When then-Fed Chair Paul Volcker fought domestic inflation in the late 1970s and early 1980s, he did so with aggressive interest rate hikes that pushed up the cost of borrowing around the world. It contributed to debt crises for 16 Latin American countries and led to what became known in the region as the “lost decade” – a period of economic stagnation and soaring poverty.

The current rate increases are not of the same order as those of the early 1980s, when rates rose to nearly 20%. But rates are high enough to prompt fears among economists. The World Bank’s most recent Global Economic Prospects report included a whole section on the spillover from U.S. interest rates to developing nations. It noted: “The rapid rise in interest rates in the United States poses a significant challenge to [emerging markets and developing economies],” adding that the result was “higher likelihood” of financial crises among vulnerable economies.

Widening the wealth gap

Research I conducted with others suggests that the kind of financial crises hinted at by the World Bank – currency depreciation and debt distress – can rip the social fabric of developing countries by increasing poverty and income inequality.

Income inequality is at an all-time high – both within individual countries and between the richer and developing countries. The 2022 World Inequality Report notes that, currently, the richest 10% of individuals globally take home 52% of all global income, while the poorest half of the global population receives a mere 8.5%. And such a wealth gap is deeply corrosive for societies: Inequality of income and wealth has been shown to both harm democracy and reduce popular support for democratic institutions. It has also been linked to political violence and corruption.

Financial crises – such as the kind that higher interest rates in the U.S. may spark – increase the chance of economic slowdowns or even recessions. Worryingly, the World Bank has warned that developing nations face a “multi-year period of slow growth” that will only increase rates of poverty. And history has shown that the impact of such economic conditions fall hardest on lower-skilled low-income people.

These effects are compounded by government policies, such as cuts in spending and government services, which, again, disproportionately hit the less well-off. And if a country is struggling to pay back sovereign debt as a result of higher global interest rates, then it also has less cash to help its poorest citizens.

So in a very real sense, a period of higher interest rates in the U.S. can have a detrimental effect on the economic, political and social well-being of developing nations.

There is a caveat, however. With inflation in the U.S. slowing, further interest rate increases may be limited. It could be the case that regardless of whether Fed policy has threaded the needle of slowing the U.S. economy but not by too much, it has nonetheless sown the seeds of more potentially severe economic – and social – woes in poorer nations.The Conversation

About the Author:

Cristina Bodea, Professor of Political Science, Michigan State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

 

Economics & Fundamentals Opinions
02 Aug

New US credit rating downgrade further fuels fears of long-term dollar decline

By George Prior 

The surprise US credit rating downgrade will trigger short-term volatility for the dollar – but more importantly, will speed-up the long-term decline of the US and global reserve currency, warns the CEO of one of the world’s largest independent financial advisory and asset management companies.

The warning from Nigel Green of deVere Group comes as rating agency Fitch downgraded the US government’s top credit rating on Tuesday to AA+ from AAA.

Fitch cited fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that puts at risk the government’s ability to pay its bills.

The deVere CEO says: “Many US analysts are predicting that this surprise downgrade of the world’s largest economy’s credit rating will only trigger short term volatility for the dollar – and the US and global reserve currency wobbled on the news, as should have been expected.

“However, as this is the second major rating agency (after Standard & Poor’s) to strip the US of its triple-A rating, there are serious, legitimate questions to be asked about the long-term trajectory of the dollar.”

He continues: “No one can predict the future, but history unequivocally teaches us that nothing lasts forever. Global reserve currencies have come and gone before.  It will happen again.

“Indeed, I believe that we are witnessing in real-time the world beginning to shift away from a dollar-dominated financial system.

“Among other reasons, this is because astronomic levels of debt, and the enormous amount of desperate money printing to monetise these debts, have caused the considerable drop in the long-term value of the currency.”

Earlier this year, Nigel Green was one of the first voices to flag the threat to the US dollar’s dominance as Russia and Saudi Arabia eye the Chinese yuan for oil trades.

He said one of the most significant, but under-reported, outcomes of a three-day summit between Russia’s Vladimir Putin and China’s Xi Jinping was that Putin said Russia is now in favour of using the Chinese yuan for oil settlements.

Separately, two deals, announced a week earlier, will see Saudi Arabia’s Aramco supplying two Chinese companies with a combined 690,000 barrels a day of crude oil, bolstering its rank as China’s top provider of the commodity. It was reported that Saudi Arabia was also in talks with Beijing to settle with the yuan instead of the dollar.

“It appears US rivals, led by China, are forming a new major economic bloc. If Saudi Arabia – home to massive oil reserves, which are estimated to be the largest in the world – does move to the yuan, that would lead to an enormous shift in the global economic system.

“Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in US dollars. This has given the US dollar a dominant role in global financial markets, as countries that want to purchase oil must first acquire US dollars in order to do so.

“If oil trading were to shift away from the US dollar, it would dramatically reduce the demand for US dollars, which would lead to a decrease in the value of the US currency.”

This could have a number of ripple effects throughout the global economy, including hugely increased inflation in the United States and potentially destabilising effects on financial markets.

Investors should begin to consider hedging against a declining dollar. Diversification across different currencies, investing in non-US assets, using derivatives, and investing in commodities and real estate are all considered effective ways to hedge against potential USD volatility.

The deVere CEO concludes: “While the latest report from Fitch will have a minimal impact, two major credit downgrades, industrial-scale money printing to monetise astronomic debts, and rivals like China and their allies looking to take the financial crown from the US, can be expected to speed-up the long-term decline of the dollar.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of more than 70 offices across the world, over 80,000 clients and $12bn under advisement.

Forex and Currency News Opinions
02 Aug

There are signs of a slowing labor market in New Zealand. The Bank of Japan will continue to maintain the stimulus policy

By JustMarkets

The US stock indices were traded yesterday without any unified dynamics. At the close of the stock exchange yesterday, the Dow Jones Index (US30) rose by 0.20%, and the S&P 500 Index (US500) fell by 0.27%. The NASDAQ Technology Index (US100) closed yesterday negative by 0.43%.

The US service sector continues to perform relatively strongly, but manufacturing is struggling, as evidenced by the ninth consecutive decline of the ISM index. At the same time, residential construction is picking up due to a shortage of homes for sale, and non-residential starts are struggling due to tighter credit conditions. The July ISM manufacturing index rose to 46.4 from 46.0 (consensus 46.9), but given that it is below the 50 level, this still indicates a contraction in the sector, and this is the ninth consecutive month of contraction. The New Orders Index rose to 47.3 from 45.6 (a contraction, but slower than in June), and the Manufacturing Index ISM jumped to 48.3 from 46.7. Despite the rising reading, all components related to manufacturing activity remain in contraction territory.

The US labor market has begun to show the first signs of cooling. According to the JOLTS report, job openings fell to 9.582 million in June from a downward revised May figure of 9.616 million. The consensus had expected a result of 9.6 million. Also weak was the employment figure, which fell to 44.4 from 48.1, the lowest level in three years. Only 17% of industries reported an increase in hiring, down from 33% in June. Such data suggests Friday’s Nonfarm Payrolls report will be weak.

Pfizer Inc (PFE) reported mixed quarterly results. Profit exceeded forecasts, but revenue fell short of expectations. The company also lowered its full-year earnings outlook, warning of near-term revenue challenges. Merck & Company Inc (MRK), meanwhile, reported a narrower loss as second-quarter revenue exceeded analysts’ forecasts, helped by higher sales of cancer drug Keytruda. Uber Technologies Inc (UBER) shares rose more than 2% after its third-quarter outlook was better than the second-quarter results but missed analysts’ forecasts on both the top and bottom lines.

Equity markets in Europe fell yesterday. Germany’s DAX (DE40) decreased by 0.85%, France’s CAC 40 (FR40) fell by 0.85%, Spain’s IBEX 35 (ES35) lost 0.89%, and the UK’s FTSE 100 (UK100) closed negative by 0.43%.

Oil prices rose in Asian trading on Wednesday, remaining at more than three-month highs, as industry data pointed to a much larger-than-expected decline in US inventories over the past week.

Asian markets were mostly up yesterday. Japan’s Nikkei 225 (JP225) increased by 0.92% yesterday, China’s FTSE China A50 (CHA50) was up by 0.38%, Hong Kong’s Hang Seng (HK50) decreased by 0.34% on Tuesday, and Australia’s S&P/ASX 200 (AU200) was positive by 0.54%. Most Asian stocks started to fall at the open on Wednesday, with technology stocks facing profit-taking after Fitch unexpectedly downgraded the US sovereign rating.

The Bank of Japan’s decision last week to change its policy of controlling bond yields was aimed at making the massive stimulus more sustainable, not a retreat from ultra-low interest rates, BOJ Deputy Governor Shinichi Uchida said Wednesday. Uchida also said there is still a long way to go before conditions are ripe for raising the short-term interest rate from the current level of minus 0.1%.

New Zealand’s unemployment rate rose in the second quarter, and wage inflation showed signs of slowing, suggesting that the labor market is starting to weaken after continuous rate hikes by the Central Bank. The unemployment rate rose to 3.6% from 3.4%. Economists expect further deterioration in New Zealand’s labor market conditions.

S&P 500 (F)(US500) 4,576.72 −12.24  (-0.27%)

Dow Jones (US30) 35,630.55  +71.02 (+0.20%)

DAX (DE40)  16,307.64 −139.19  (-0.85%)

FTSE 100 (UK100) 7,666.27 33.14 (-0.43%)

USD Index  102.23 +0.37 (+0.36%)

Important events for today:
  • – New Zealand Unemployment Rate (q/q) at 01:45 (GMT+3);
  • – Japan Monetary Policy Meeting Minutes at 02:50 (GMT+3);
  • – US ADP Nonfarm Employment Change (m/m) at 15:15 (GMT+3);
  • – US Crude Oil Reserves (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.

Economics & Fundamentals Financial News
02 Aug

Fitch downgrades US: What you need to know

By ForexTime

The US has lost its top-tier AAA credit rating as assigned by Fitch Ratings, now downgraded down one level to AA+.

US Treasury Secretary Janet Yellen “strongly disagreed” with Fitch’s decision, blasting it as “arbitrary and based on outdated data”.

But that hasn’t stopped global markets from adopting a slightly risk-off mode for the time being:

  • US stock futures are falling to extend August’s losses so far
  • Gold is edging higher though still trading around the mid-$1900s
  • The safe haven Japanese Yen is the only G10 currency to climb against the US dollar

However, the full fallout directly from this downgrade should prove to be limited and short-lived.

Read on to find out more.

 

What does Fitch Ratings do?

Fitch Ratings assigns a credit rating to various entities that issue debt, ranging from governments to corporates.

  • Fitch’s highest rating is ‘AAA’, which means the country/company has the lowest risk of defaulting, i.e. has an “exceptionally strong capacity” to meet its financial commitments, such as paying interest on a bond.
  • The lowest rating is ‘D’, which is assigned when the debt issuer has entered into bankruptcy proceedings.

This credit rating points to the financial strength and ability to meet debt commitments, such as making interest payments on bonds issued.

 

How do investors use these credit ratings?

Global investors rely on these credit ratings to decide which country’s debt to buy:

  • Debt with the ‘AAA’ through ‘BBB’ ratings are deemed as investment grade (low to moderate risk of default).
  • Debt issuers with ‘BB’ and lower ratings are deemed as “speculative grade” (high risk of default, i.e. not able to meet its payment obligations).

    Investors with a higher tolerance for risk may buy such debt with lower credit ratings, as they tend to offer higher yields to compensate investors for the greater risk of default.

In short, the higher the credit rating, the “safer” the investment is deemed, and vice versa.

 

Why was the US downgraded?

The US was downgraded because Fitch Ratings expects the following:

  • “Fiscal Deterioration”: US government’s financial strength to worsen over the next 3 years.
  • “Rising Deficit”: US government set to spend more money at a faster pace than it can generate income (taxes), resulting in a bigger budget gap.
  • “Erosion of governance”: the repeated debt-ceiling standoffs in US Congress elevates the risk of a first-ever US default, which was only just narrowly avoided this past May.

This downgrade is a follow-through on Fitch’s warning, made back in May, amidst the US debt ceiling drama.

Fitch Rating’s full statement can be found here.

 

Has this happened before for the US?

Yes, almost exactly 12 years ago.

The US experienced its first-ever credit rating downgrade back in August 2011, by S&P – another credit ratings agency.

Hence, given that Fitch’s move is not unprecedented (we’ve seen it before over a decade ago), nor does it unveil anything startling that market’s don’t already know, that should explain the relatively muted reaction in the markets.

 

Are markets reacting as expected?

Yes, but not without a tinge of irony.

Amidst the risk-off moves mentioned at the top of this article …

the US dollar – the world’s “preeminent” reserve currency – is also gaining against other currencies, including many of its G10 and emerging-market counterparts.

 

Why is the USD’s strength ‘ironic’?

Typically, if a country’s credit rating is downgraded, the initial reaction would be for investors to shy away from its assets and currency.

But this is the United States that we’re talking about here – the world’s largest economy!

After all, global financial markets and investors have long seen US Treasuries (debt issued by the US government) as the “golden-standard” for risk-free assets.

Hence, investors have been flocking to shorter-term US Treasuries (yields on 2-year and 5-yearTreasuries are moving lower) as such “safe haven” assets help investors protect their wealth amid times of uncertainty.

Ironic, given that Fitch Rating’s downgrade actually casts doubt over the US government’s ability to meet its debt obligations.

 

How long will the risk-off mode last?

Not long, probably.

At least in terms of whatever market reaction that can and should be attributed to today’s decision by Fitch Ratings.

After all, long-time investors will point to how the S&P 500 – the benchmark for US stock markets – recovered all its losses within 6 months after that first-ever US credit ratings downgrade back in August 2011.

Back then, the S&P 500 surged by nearly 30% between that August 2011 intraday trough until that peak in early-April 2012.

 

In today’s context, investors appear to have greater concerns at present.

The likelihood of a global recession and the risk of further Fed rate hikes – these factors are set to be the greater catalyst for a sustained risk-off mode across global financial markets, rather than Fitch’s downgrade of the US.

Forex-Time-LogoArticle by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Economics & Fundamentals Financial News
01 Aug

The RBA left the interest rate unchanged again. Rising oil prices boost energy sector growth

By JustMarkets

At yesterday’s stock market close, the Dow Jones Index (US30) increased by 0.28%, while the S&P 500 Index (US500) was up by 0.15%. The NASDAQ Technology Index (US100) closed positive by 0.21% on Monday. The Dow Jones Index closed higher for the second consecutive month. Investors are waiting for the US Federal Reserve to end its tightening cycle soon. But the market volatility indicator VIX, which is known in trading circles as the fear indicator, is still near this year’s lows and at its lowest point since the global pandemic began in 2020. That means a correction could occur on stock indices in the near term.

Energy stocks are rising on the back of Chevron’s upgrade. Energy stocks were boosted by a more than 3% increase in shares of Chevron (CVX) after Goldman Sachs upgraded the major oil company’s rating, indicating its strong growth potential. Energy stocks were also boosted by a rise in oil prices to multi-month highs amid expectations of tightening supply and rising demand.

Johnson & Johnson (JNJ) fell by 4% after a court on Friday rejected the company’s plan to put its subsidiary LTL Management into bankruptcy to deal with tens of thousands of lawsuits alleging the company’s talcum powder causes cancer.

Equity markets in Europe traded flat yesterday. Germany’s DAX (DE40) decreased by 0.14%, France’s CAC 40 (FR40) added 0.29%, Spain’s IBEX  5 (ES35) lost 0.45%, and the UK’s FTSE 100 (UK100) closed positive by 0.07%.

In the Eurozone, overall inflation fell in July, while core inflation remained unchanged. At the same time, services inflation rose again. Services inflation increased to 5.6% y/y in July from 5.4% y/y in June. An increase in services inflation is not what the ECB would like to see, as services prices are most sensitive to wage growth and could indicate that the labor market remains too tight. ECB President Christine Lagarde reiterated that the ECB could still raise rates in the future if needed, calling GDP data from Spain, France, and Germany “encouraging.” This increases the likelihood that the ECB will hold another 0.25% rate hike at its September meeting.

The growing divergence between gold futures and the spot price indicates that traders expect the Fed to complete its rate hike cycle before the end of the year, which is expected to lead to a large influx of funds into precious metals.

Asian markets rallied strongly last week. Japan’s Nikkei 225 (JP225) rose by 1.26% yesterday, China’s FTSE China A50 (CHA50) added 0.27%, Hong Kong’s Hang Seng (HK50) gained 0.82% on Monday, and Australia’s S&P/ASX 200 (AU200) ended the day positive by 0.09%. Most Asian stocks continued to rise on Tuesday. Optimism about an improving global economic outlook amid lower inflation and sustained growth in major economies is driving capital inflows into risky stocks. Sentiment for Japanese stocks was boosted by the Bank of Japan’s emergency bond purchases, raising bets that the BOJ will not be in a rush to tighten policy.

Australia’s Central Bank left its interest rate at 4.1% for the second consecutive month but warned that some more tightening may be needed to contain inflation. The Reserve Bank of Australia (RBA) forecasts core inflation to slow to around 3.25% by the end of 2024 and return to within the target range of 2-3% by the end of 2025.

S&P 500 (F)(US500) 4,588.96 +6.73  (+0.15%)

Dow Jones (US30)  35,559.53 +100.24 (+0.28%)

DAX (DE40)  16,446.83 −22.92 (-0.14%)

FTSE 100 (UK100) 7,699.41 +5.14 (+0.07%)

USD Index  101.89 +0.26 (+0.26%)

Important events for today:
  • – Japan Unemployment Rate (m/m) at 02:50 (GMT+3);
  • – Australia RBA Interest Rate Decision (m/m) at 07:30 (GMT+3);
  • – Australia RBA Rate Statement (m/m) at 07:30 (GMT+3);
  • – German Manufacturing PMI (m/m) at 10:55 (GMT+3);
  • – Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+3);
  • – UK Manufacturing PMI (m/m) at 11:30 (GMT+3);
  • – Eurozone Unemployment Rate (m/m) at 12:00 (GMT+3);
  • – Canada Manufacturing PMI (m/m) at 16:30 (GMT+3);
  • – US ISM Manufacturing PMI (m/m) at 17:00 (GMT+3);
  • – US JOLTs Job Openings (m/m) at 17:00 (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.

Economics & Fundamentals Financial News
01 Aug

Markets Brace For Another Event Heavy Week

By ForexTime

Asian markets were a mixed bag on Tuesday as weak China data countered the initial optimism set off by Wall Street overnight, after the benchmark S&P 500 notched its fifth consecutive monthly gain. European shares are flashing red amid the market caution with risk appetite taking another hit thanks to disappointing manufacturing activity data. Looking at currencies, the USD seems to be drawing strength from the tense mood while the Australian dollar has weakened across the board after the Reserve Bank of Australia left interest rates unchanged. Elsewhere, oil prices have slipped after bagging its biggest monthly gain since early 2022, while gold is wobbling around $1955 pressured by an appreciating buck.

Big week for the dollar

The greenback has kicked off the new month on a firm note, appreciating against every single G10 currency.

Dollar bulls seem to be drawing strength from cautious sentiment and a sense of anticipation ahead of some key data this week. Given the Federal Reserve’s shift to data dependence, every US economic release moving forward will act as a key piece of information that may determine whether the Fed raises rates one final time in 2023 or not. This could translate to increased volatility for the US dollar over the next few months.

Focus will be directed towards the US ISM manufacturing report later today which has been in contractionary territory since November 2022. But the main risk event and potential market shaker will be the July nonfarm payrolls (NFP) on Friday. Ultimately, a weaker-than-expected jobs report could support the argument around the Fed being done with raising rates in 2023.

Currency spotlight – GBPUSD 

Sterling may experience heightened volatility this week due to the Bank of England rate decision on Thursday. Given how the decision will be accompanied by the quarterly Monetary Policy Report (MPR), this Super Thursday combo could send GBPUSD on a roller coaster ride. Markets widely expect the BoE to raise interest rates by 25bp in the face of sticky inflation. However, recession fears remain elevated amid disappointing data, and this could offer support to the doves on the MPC. Should the central bank surprise markets with a 50bp hike, this could send the British Pound surging across the board.

Commodity Spotlight – Gold 

The Fed’s shift to data dependence may translate to heightened volatility for gold, with the precious metal poised to display increased sensitivity to Friday’s NFP report.

Given how markets are only pricing in a 19% probability of a rate hike in September with this jumping to 37% by November, gold bulls remain in a comfortable position. However, September’s Fed meeting is just less than two months away which is enough time for much to happen.

Nevertheless, the path of least resistance for gold points north with a disappointing jobs report on Friday potentially opening a path back toward $1985. A solid breakout above this point could open the doors toward the psychological $2000 level. Should prices slip back below the 50-day SMA, a decline toward $1940 and $1932 could be on the cards.

Forex-Time-LogoArticle by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Economics & Fundamentals Financial News
01 Aug

Japanese Yen Depreciated After the Bank of Japan Meeting Outcome

By RoboForex Analytical Department

The USD/JPY pair surpassed its local daily high of 141.95 on Monday and is currently trading near 143.00.

USD/JPY experienced increased volatility at the end of last week: it initially fell by about 2% on the Nikkei news report that the Bank of Japan (BOJ) might announce the beginning of normalising its “soft” monetary policy but then returned to the area of daily highs after the Bank of Japan announced the meeting outcome.

The BOJ kept the interest rate at -0.1% and did not raise the upper bound of yield on 10-year Japanese government bonds. In its issued statement, it noted that this limit is not a “dogma” but merely a reference serving as a guide to action.

As a result, the expectations of the Bank of Japan winding down its “soft” monetary policy due to rapidly rising inflation have not been confirmed yet. According to Bloomberg surveys, many economists and analysts expect the Bank of Japan to begin normalising monetary policy no earlier than October.

Technical analysis of the USD/JPY currency pair

On the H4 chart of USD/JPY, the calculated target for the fifth upward wave has been reached at 142.44. Today, the market is forming a consolidation range around this level. An expansion to 143.21 is not ruled out. Next, we will consider a decline to the level of 140.66, followed by a rise to 144.62. Technically, this scenario is confirmed by the MACD oscillator. Its signal line is trading above the zero mark and has exited the histogram zone. We expect the indicator to begin decreasing towards the zero level.

On the H1 chart of USD/JPY, a consolidation range has formed around the level of 140.66. After breaking above this range, the local target at 142.44 was achieved. Currently, the market is forming a consolidation range around this level. A potential upward move to the level of 143.23 is not excluded if there is a breakout above this range. In case of a downward breakout, we will assess the probability of a correction to 140.66, followed by a rise to 143.28. Technically, this scenario is supported by the Stochastic oscillator, with its signal line above the 80 mark, preparing to decline towards the 50 mark. After this anticipated decline, we expect another upward movement towards the 80 mark.

Disclaimer

Any forecasts contained herein are based on the author’s particular opinion. This analysis may not be treated as trading advice. RoboForex bears no responsibility for trading results based on trading recommendations and reviews contained herein.

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