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U.S. stocks joined a global sell-off in recent months as an unexpected downgrade in the country’s debt rating and a stronger-than-expected jobs report heightened concerns that they could weigh on longer-term interest rate hikes. It was the biggest drop of the day. risk assets.
The Wall Street benchmark S&P 500 fell 1.4% on Wednesday, its biggest one-day drop since late April, while the tech-focused Nasdaq Composite fell 2.2% since February. It was the biggest one-day drop.
Fitch downgraded the U.S. credit rating from triple-A to double-A+ late Tuesday, citing rising government debt burdens and conflicting debt ceilings that pushed the world’s largest economy close to default two months ago.
Fitch signaled a possible downgrade in May, but few analysts expected the market to change significantly as a result. Still, such a warning by a major rating agency is only the second time that a similar move by Standard & Poor’s shook financial markets in 2011, in part due to a tense debt ceiling battle. board.
“The difference from the S&P move in 2011 is that then yields fell as investors sought safety in Treasuries and the dollar, but now they are higher. That may be the key to everything. It could be,” said Michael Arone, chief investment strategist at State Street Global Advisors.
Rising yields may indicate that investors perceive greater risk.
The United States narrowly avoided a government default in June, after months of tension over spending cuts, when the federal borrowing limit was lifted at the 11th hour.
Combined with news that the U.S. Treasury Department plans to sell more bonds to cover the deficit, Fitch’s move was enough to push 10-year Treasury yields to about 4.13%, the highest since early November. became. It returned to about 4.07% and remained slightly higher during the session. As yields rise, bond prices fall.
“At a time when the 10-year bond yield was above 4%, [autumn] “The stock market fell 20% last year, so it will be very difficult for this expensive stock market to continue to rise as it has in the past,” said Matt Maley, chief market strategist at Miller Tabak. ‘ said. so far this year. “
US Treasurys didn’t move much on Wednesday, but they helped cement yields above 4%. This is an important level for market watchers as the 10-year benchmark has failed to surpass it for a long time since 2007.
But the dollar was strong, gaining 0.3% on the day.
Analysts at Action Economics said the strength of the dollar index pretty much says it all. “The US is still the cleanest shirt in the basket, which limits the negative impact.”
Also on Wednesday, new data showed that the U.S. labor market remains tight despite rising interest rates. Private sector employment rose by 324,000 in July, well above analyst expectations of 189,000, according to the ADP National Employment Survey.
“That’s the news that drives yields higher,” said Mayley. “It makes rates more likely to stay high for a long time … even if the Fed stops rate hikes soon.”
The strong numbers support the view that the U.S. economy may be on track for a “soft landing,” but the diminishing likelihood of a slowdown or recession means interest rates may not return to low levels anytime soon.
Investors should get more insight into the labor market on Friday when the nonfarm payrolls are released.
Wall Street’s decline was followed by a similar slump in Europe, where the Stoxx European 600 Index closed 1.4% lower. In Asia, Hong Kong’s Hang Seng Index fell 2.5%, while Japan’s TOPIX fell 1.5%.
London’s FTSE 100 Index closed 1.4% lower a day before the Bank of England was expected to raise its benchmark bank rate to 5.25%.
