Disclaimer: this is intended for educational purposes only and is not investment advice. Please do your own due diligence.

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TL;DR: Investor focus has shifted from the US credit rating cut to BoE rate announcement and Apple/Amazon earnings today, which will likely be used as a barometer to whether the high tech valuations are justifiable. The S&P 500 fell 1.4% yesterday while the Nasdaq lost 2.2% as strong US labor data renewed inflation concerns.

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📰 Market Movers

Stocks

• US stocks experienced their biggest one-day drop in months, as the Fitch downgrade of the country’s debt rating and stronger-than-expected jobs data raised concerns over potentially higher interest rates. The US private sector added 324,000 jobs in July, well above analyst estimates of 175,000. 

• S&P 500 fell 1.4%, while the tech-focused Nasdaq Composite gave up 2.2%.

• Asian stocks fell for the third day, following the losses on Wall Street.

• US and European equity futures are mostly flat today.

• Apple, Amazon, and Moderna report earnings today.

Bonds

• Bank of England is expected to boost rates again today by 25bps to 5.25% due to the recent inflation slowdown. Year-end rates could peak around 5.75%. The UK remains behind its peers in combatting inflation, and some market participants are wary of a potential 50bps hike.

• Fitch's cut of US credit rating resulted in 10-year Treasuries yields reaching almost 4.13%, their highest since early November.

FX

• The yen dropped after the BOJ announced another round of unscheduled JGB purchases.

• Despite the US credit rating cut, the dollar remained firm, rising 0.3% on the day. The US currency remains attractive due to its relative economic stability.

• Sterling hovered at $1.2701, with BOE expected to hike rates.

Commodities

• Brent crude futures rose 0.2% to $83.37 per barrel as markets weighed bullish U.S. inventory data and a likely extension of OPEC+ output cuts.

• Gold prices remained flat at $1,934.39 per ounce.

• Concerns remain that the new UK border controls regime for animal and plant products from the EU, now delayed, may cause inflationary pressures.

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📊 Chart of the Day

This time last year, you could bet that if inflation came in higher than expected, markets would fall, and if inflation was below expectations, they would rally.

The same is not true in 2023, where since March US inflation has printed lower than expected, but the market response has been muted.

US headline CPI and S&P 500 performance

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🤿 Deep Dive

Were you surprised to see US Treasuries downgraded to an AA+ credit rating? Fitch released a full transparent article explaining their reasoning, which you can find here.

If you’re pressed for time, here’s the TL;DR:

• Fitch Ratings has downgraded the United States' Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'AA+' from 'AAA' due to expected fiscal deterioration, growing government debt, and an erosion of governance standards.

• The U.S. general government deficit is projected to rise to 6.3% of GDP in 2023, further widening to 6.9% of GDP in 2025, while the debt-to-GDP ratio is anticipated to increase from 112.9% in 2023 to 118.4% in 2025.

• Repeated debt limit standoffs and last-minute resolutions have undermined confidence in the Government’s fiscal management.

• Medium-term challenges related to rising social security and Medicare costs due to an aging population remain largely unaddressed.

• The U.S. is expected to enter a mild recession in late 2023 and early 2024, with annual GDP growth projected to slow to 1.2% in 2023 and 0.5% in 2024.

• Several structural strengths, including a large, advanced, diversified and high-income economy, and the U.S. dollar's status as the world's preeminent reserve currency, support the U.S.' ratings.

• Any additional increase in government debt or decline in policy coherence that impacts the U.S. dollar's reserve currency status could lead to a further rating downgrade while addressing rising mandatory spending with fiscal policy could lead to a positive rating action.

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