Global Markets Dropped 2% After U.S. Debt Downgrade

Barry Adams
02 Aug, 2023
New York City

Market indexes on Wall Street fell more than 2% after Fitch Ratings lowered its long-term credit rating for the U.S. by one notch. 

The S&P 500 and the Nasdaq Composite dropped after tech stocks led the decliners and the rating downgrade was the more reason for the market to consolidate after a rally of nine months. 

Profit-taking sentiment drove tech stocks lower and several leading tech companies fell sharply. 

Meta Platforms, Alphabet, Apple, Amazon.com, Tesla and Microsoft declined between 2% and 3%.  

Market indexes opened lower and selling intensified in the early hours of trading with the Nasdaq index falling as much as 2.6% by midday. 

Market averages attempted a rebound for the next two hours but turned lower in the final hour of trading after sellers overwhelmed buyers. 

Fitch's rating downgrade met some resistance on Wall Street and among leading economists for its reasoning and timing. 

But the rating action came just days ahead of the U.S. Treasury ramping up its borrowing to as much as $103 billion starting next week. 

Moreover, the U.S. government is also expected to post a larger than expected budget deficit of as much as 6%, driven in part by sky-high military spending. 

Fitch had placed the U.S. debt on its watch list with negative implications in late May but most economists panned the downgrade and added that beyond the shock value of the rating action, financial markets will continue on its path. 

Former U.S. Treasury Secretary Larry Summers labeled Fitch's decision "bizarre and inept" but failed to clarify how long the U.S. can keep adding to its gigantic pile of federal government debt without long term consequences. 

Allianz Chief Economic Advisor Mohamed El-Erian added the reasoning and timing of the rating agency's decision was "perplexing." 

"It doesn't really matter that much" said JPMorgan chief executive Jamie Dimon in an interview with CNBC. 

Dimon went on to add that it is the market that determines interest rates or the borrowing costs. 

But markets are influenced by what rating agencies have to say and how debts are rated and compared to other issuers in the market, so the ratings do have significant influence on the level and direction of interest rates. 

Market indexes are expected to recover from the decline but other longer term factors could also impact market direction.   

Core inflation is still running significantly ahead of the Fed's target rate of 2%, despite the recent cooling of overall inflation. 

The wider acceptance of the soft landing scenario among investors has bolted market indexes to double digit gains and extended nine-month rally but  corporate profits have been mixed and barely meeting lowered expectations. 

In other economic news, the private sector added 324,000 net new jobs in July, the latest survey from ADP said Wednesday. 

Job gains declined from a downwardly revised whopping 455,000 increase in June, but were still significantly ahead of the 189,000 estimated by economists in a survey conducted by Dow Jones. 

Bulk of job additions were in the service sector totaling 303,000, driven by 201,000 leisure and hospitality and 30,000 in information management. 

Investors also reacted to the fresh batch of earnings as the busy of week of releases rolled on. 

AMD, CVS health, Humana, Ferrari, Match.com, Starbucks and Freshworks were in focus. 

 

U.S. Indexes & Yields 

The S&P 500 index traded down 1.4% to 4,513.42 and the Nasdaq Composite declined 2.2% to 13,975.57. 

The yield on 2-year Treasury notes increased to 4.91%, 10-year Treasury notes inched higher to 4.08% and 30-year Treasury bonds edged down to 4.18%. 

Crude oil decreased $1.49 to $79.87 a barrel and natural gas prices decreased 7 cents to $2.48 a thermal unit. 

 

U.S. Stock Movers 

Ferrari NV increased 1.3% to $321.69 after the maker of luxury sports cars lifted its annual outlook and reported better-than-expected quarterly earnings. 

Advanced Micro Devices, Inc decreased 1.1% to $116.30 after the semiconductor chipmaker reported stronger-than-expected sales and earnings in the second quarter but forecasted weaker-than-expected third quarter sales. 

Match Group Inc jumped 1.7% to $47.95 after the online dating site reported strong increase in sales and earnings in the second quarter and forecasted sales are likely to be ahead of market expectations. 

Starbucks Corp increased 0.8% to $102.03 after the coffee chain operator reported higher-than-expected sales in the fiscal third quarter on a sales rebound in China. 

Sales at stores open at least 13 months in China soared 46% from a year ago, after Covid-restrictions ended. 

Revenue in the quarter ending on July 2 rose 12% to $9.2 billion and  the company opened 588 net new stores in the quarter, increasing the worldwide total to 37,000. 

Net earnings attributable to shareholders increased to $1.1 billion from $913 million and diluted earnings per share rose to 99 cents from 79 cents a year ago. 

 

European Markets Rebounded from 2% Loss, Crude Oil In Focus 

European markets dropped mirroring losses in Asian markets after worries about U.S. fiscal management and growing debt resurfaced. 

Fitch Ratings lowered its credit rating to AA+ from AAA citing persistent governance issues. 

Rating agencies have been slow in downgrading the U.S. debt, despite more than a decade of weakening governance, rising debt levels and outsized military spending. 

Fitch also noted that the U.S. government deficit is expected to rise to 6.3% in 2023 from 3.7% in 2022. 

In stock trading, market indexes in Frankfurt, Paris and London declined more than 1% but the U.S. dollar held up. 

Closer to home, the number of people registering in Spain as unemployed declined by 10,968 to 2.68 million in July, the ministry of Labor and Social Security reported Wednesday. 

Unemployment declined for the fifth month in a row, reaching the level since 2008 when it was 2.62 million. 

A separate report from the ministry showed that 16,285 net formal jobs were added in July, increasing the total number of jobs to 20.71 million. 

Crude oil advanced to a 3-month high after an industry report suggested a 4-decade higher weekly drawdown of inventories last week. 

 

Crude Oil Advanced to 3-month High 

Crude oil prices rose to a three-month high after U.S. crude oil inventories declined by 15.4 million barrels last week, a report from American Petroleum Institute noted Tuesday. 

The decline in inventories significantly higher than expected  1.37 million barrels withdrawal in the week.  

If the industry association's withdrawal estimate is confirmed by the official data on Wednesday, it will be the largest drawdown in four decades in a week. 

Moreover, Saudi Arabia is also expected to announce an extension of its one million barrels per day production cut through September at the OPEC meeting on Friday. 

To arrest the rising energy prices, the Biden administration withdrew its offer to buy 6 million barrels of oil for the U.S. Strategic Petroleum Reserve.  

 

Europe Indexes & Yields

The DAX index decreased 0.8% to 16,020.02, the CAC-40 index fell 1.3% to 7,312.84 and the FTSE 100 index dropped 1.4% to 7,561.53.  

The yield on 10-year German bonds increased to 2.46%, 8rench bonds traded higher to 3.05%, the UK gilts edged up to 4.39% and Italian bonds increased to 4.15%.

The euro edged lower to $1.097, the British pound to $1.271 and the U.S. dollar fetched 87.81 Swiss cents

Brent crude increased $1.21 to $83.59 a barrel and the Dutch TTF natural gas increased €1.83 to €28.95 per MWh.

 

Europe Stock Movers

Mining companies traded down on the ongoing worries that demand growth from China is likely to remain weak for several quarters as policy makers struggle to devise new stimulus measures and revive moribund property market. 

Glencore, Antofagasta and Anglo American gained between 1% and 2%. 

Ferrexpo Plc declined 1.4% to 91.32 pence after the iron mining company reported a decline in pallet production in the first-half of 2023. 

BAE Systems Plc gained 4.6% to 976.60 pence after the defense contractor and military hardware maker reported strong financial results in the first-half and lifted its guidance for 2023.  

Siemens Healthineers AG declined 7.1% to €48.57 after the medical devices maker reported an unexpected decline in quarterly operating earnings but the company reiterated its full-year 2023 outlook.   

Schaeffler AG decreased 0.4% to €5.75 despite the German industrial and automotive products maker lifted its margin outlook for 2023 and supported sales growth estimates for the year. 

Hugo Boss AG decreased 1.1% to €72.16 despite the men's apparel company reporting higher sales and earnings in the second quarter and lifting its forecast for 2023. 

Taylor Wimpey Plc gained 3.2% to 117.80 pence after the company reported better-than-expected first-half results. 

 Roche Holding AG declined 1.0% to CHF 296.0 pence and Novartis AG dropped 1.0% to CHF 90.15 after two companies were engaged in a patent dispute. 

Roche's subsidiary Genentech accused Novartis unit Sandoz of infringing one of its patents.