US futures slumped as part of a global risk-off tone (but were well off their lows, which were down as much as 1%), after the US was stripped of its AAA top-tier credit rating by Fitch (which joined S&P in doing so back in 2011), due to growing fiscal deficits and an “erosion of governance" even as Treasuries yields and the Dollar were steady. And in a complete coincidence, at the exact same time, Donald Trump was indicted for a record third time on federal charges over his efforts to overturn the 2020 presidential election, and has a court date set for Thursday.
As of 7:45am, emini S&P futures were down 0.5%, while Nasdaq 100 futures slid 0.8%, signaling a pullback later Wednesday for a market that has surged 44% in 2023. Broad losses in Europe dragged all industry groups in the benchmark regional index into the red. Asian and European stocks slumped, while the Treasury curve steepened with two-year TSY yields falling 4bps to 4.86%; the Bloomberg Dollar Spot Index was barely changed, up 0.1%.
In premarket trading, AMD rose as much as 1.2% in premarket trading on Wednesday, after the chipmaker reported better-than-expected second-quarter results and said it was making further inroads in artificial-intelligence computing. Analysts noted that there are indications that the PC business was recovering and they were also optimistic about the company’s AI potential. Starbucks dropped as its quarterly sales fell short of analysts’ estimates, a sign that momentum may be slowing for the coffee giant amid higher prices and tighter pocketbooks. Pinterest slid after the social networking company failed to meet heightened expectations. Apple and Amazon.com are among companies scheduled to report this week, with investors on the lookout for clues on how high interest rates are affecting the economy. Here are some other notable premarket movers:
There was disagreement over the consequences of the Fitch downgrade: some said it serves up an extra dose of jeopardy for equity investors already concerned over the risks of recession and whether this year’s run-up in stocks is sustainable; others looked at the complete lack of reaction in Treasuries and claims it is a complete non-event, and that it will be forgotten by the market in a few hours. And indeed, Treasuries were steady, in keeping with Janet Yellen’s assertion that they remain “the world’s preeminent safe and liquid asset" for now.
“One can have the feeling that the market is looking for excuses to take some profits,” said Alexandre Baradez, chief market analyst at IG Markets in Paris. “But rather than the Fitch downgrade, I suspect that what’s currently being priced is the growing risk of an economic slowdown. The downward trend started to emerge yesterday on the back of disappointing Chinese and US data, which suggests it’s not really about the rating downgrade, but rather the risk of a slowdown.”
Indeed, the consequences of the latest downgrade seem positively tame by comparison: the last time the US sovereign credit rating was downgraded, the S&P plunged 6.7% with all stocks in the red for the first time since at least 1996, and briefly dropped into a bear market (the benchmark eventually erased those losses five trading days later and is up 282% since). Also, yields tumbled, gold exploded and the SNB was forced to devalue the franc.
European stocks also slumped with the Stoxx 600 down 1.3% and on course for its largest fall in almost four-weeks. Ferrari slumped more than 4% after the Italian supercar maker issued disappointing guidance. Siemens Healthineers AG fell after the German medical technology company missed estimates. Hugo Boss AG dropped after the fashion retailer’s margin fell short of expectations and inventories rose. Here are the biggest European movers:
Earlier in the session, Asian stocks posted the biggest decline in more than four months as technology names dropped. Japanese stocks slumped the most this year as gains in the yen dented the outlook for corporate profit; the Nikkei 225 underperformed and dipped below the 33,000 level as the focus shifted to corporate earnings and despite comments from BoJ’s Deputy Governor Uchida who stuck to a dovish tone.
The MSCI Asia Pacific Index fell 1.5%, with all sectors and major markets in the red. Benchmarks dropped more than 1% in Japan, South Korea and Taiwan, and about 2% in Hong Kong, as investors booked profits on chip and electric-vehicle stocks that have surged on artificial intelligence and net-zero emissions trades. “It’s buyers’ fatigue,” said Derek Tay, head of investments at Kamet Capital Partners. US stock futures declined after Fitch stripped the US of its top-tier credit grade, though few market participants saw that as having a major impact on Asian equities. Some investors rather appeared to be taking bets off the table ahead of US employment data later this week, which may influence the Federal Reserve’s next policy decision. “We’ve had an extraordinary run in risk markets and we are starting to get some steepening in the yield curve,” said Matthew Haupt, portfolio manager at Wilson Asset Management in Sydney. “We might get some squeeze on that big rate-cut trade,” he added. The MSCI Asian benchmark earlier this week flirted with its highest close since last April after a rally fueled by hopes for Chinese efforts to boost its economic recovery and a peak-out in US interest rates. The gauge is still up about 6% since the start of June. Australia's ASX 200 declined with utilities, real estate and financials leading the broad-based retreat and with weaker AIG Manufacturing and Construction data adding to the glum mood.
In FX, the Bloomberg dollar index erased losses as investors bought into the dip that followed Fitch Ratings’ US sovereign credit-rating downgrade. Leveraged short covering of the yen and Australian dollar was short-lived with the latter breaching support below 0.6600 as an Asia Pacific equity gauge headed for the biggest decline in almost a month. New Zealand’s dollar was sold for the greenback and Aussie as a jump in the nation’s jobless rate fueled bets that rates had peaked.
In rates, the front-end of the Treasury curve led gains, extending Tuesday’s steepening move and leaving 2-year notes richer by around 4bp in early US trading. Longer Treasuries broadly shrugged off the US downgrade news. US 10-year yields are little changed on the day, sitting around 4.02% and offering muted reaction to the Fitch downgrade; bunds outperform by around 4bp in the sector while gilts trade slightly cheaper. Front-end gains on the day steepen 2s10s, 5s30s spreads by 3.8bp and 3bp, with both remaining near session highs. For the first time since November 2020, the quarterly unveiling of auction amounts is expected to feature across-the- board increases to the Treasury’s seven main offerings of notes and bonds. German two-year yields fall 6bps to a two-week low of 3.01%. Dollar IG issuance slate empty so far; Tuesday session was inactive for new deals, while August volume projection is around $85 billion. A focus of the day is the quarterly refunding announcement at 8:30am New York time.
“US Treasuries are the world’s largest and most liquid sovereign bond market,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore. “It’s unthinkable large global bond investors will decide to entirely exclude US Treasuries from their holdings. If they do, what USD-denominated bonds will they hold?”
In commodities, oil extended its rally with Brent crude up 0.8%, after API pointed to a huge, in fact a record 15 million drawdown in US inventories, adding to signals the market is tightening. Spot gold adds 0.3%. Bitcoin gains 0.9%
After a data heavy day yesterday, we have only the US July ADP report as the major data release to look forward to today. But watch out for the refunding announcement. Key company earnings include semiconductor firm Qualcomm, as well as Teva, Shopify, PayPal, Occidental Petroleum, Equinix, Kraft Heinz, DoorDash, Albemarle, MGM Resorts, Zillow, and Etsy.
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APAC stocks traded lower following the mostly negative lead from Wall St where sentiment was dampened by higher yields and weak data, while participants also digested Fitch's credit rating downgrade for the US from AAA to AA+. ASX 200 declined with utilities, real estate and financials leading the broad-based retreat and with weaker AIG Manufacturing and Construction data adding to the glum mood. Nikkei 225 underperformed and dipped below the 33,000 level as the focus shifted to corporate earnings and despite comments from BoJ’s Deputy Governor Uchida who stuck to a dovish tone. Hang Seng and Shanghai Comp conformed to the risk aversion albeit with the downside in the mainland initially cushioned by further policy support and jawboning by Chinese agencies.
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European bourses are in the red, Euro Stoxx 50 -1.4%, as sentiment continues to deteriorate from a downbeat Wall St./APAC handover. Sectors are similarly in the red with earnings dominating stock specifics while the Energy sector is the relative outperformer, but still lower, given benchmark action. Stateside, futures are lower as the risk-off trade continues with sizeable attention on Fitch's action, ES -0.8%; ADP and Quarterly Refunding dominate the calendar ahead intersected by numerous earnings.
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DB's Jim Reid concludes the overnight wrap
Just when you thought it was safe to unwind into your holidays, after Europe went to bed last last night, Fitch Ratings downgraded the US from AAA to AA+ in a surprise move reminiscent of S&P's back in August 2011. The rating agency had initially put the US on ratings watch back in May during the debt ceiling fight. In a corresponding statement, Fitch cited that tax cuts and new spending initiatives coincided with multiple economic shocks to rapidly grow the government’s debt burden. The rating reflects the political brinkmanship reflected in the debt ceiling fights, but also takes into account the forecast debt-to-GDP ratio which Fitch estimates will reach 118% by 2025, with the median AAA rated ratio being 39%. See our rates strategists' immediate reaction to the decision here with one of the takeaways being that it should continue to help reprice term premium going forward. Obviously S&P being the first to downgrade 12 years ago was far bigger news and has allowed investors to adjust for the most important bond market in the world not being a pure AAA anymore but it's still a big decision. Treasury yields sold off aggressively yesterday before the announcement due to concerns about the upcoming funding announcement as we’ll see below but have been a bit confused since the announcement as they initially rallied on a global risk-off move and then sold off to be c.1bps higher in Asia.
S&P 500 (-0.46%) and NASDAQ 100 (-0.56%) futures are lower as a result with Asian markets weak. The Hang Seng (-1.97%) is emerging as the biggest underperformer followed by the Nikkei (-1.84%), the KOSPI (-1.40%), the Shanghai Composite (-0.84%) and the CSI (-0.70%).
The downgrade follows an interesting story that has been bubbling under the surface around the US deficit and what that means for issuance and yields. 10yr Treasuries rose +6.4bps yesterday, before the Fitch news, to the highest level since the first half of July and 2s10s steepened +3.9bps in what seemed to be a delayed reaction, in thin markets, to Monday's surprise announcement from the Treasury of a larger than expected borrowing estimate for the rest of the year. 30yr yields rose +8.2bps to 4.092% and are now at their highest levels since November. Today sees the subsequent refunding announcement at 8:30am EST where we’ll know more about the issuance pattern in the next few months. See our rates strategists' preview here where they say their expectations have been boosted by Treasury borrowing over the next 5 months that is $500bn more than they originally expected.
I did a CoTD last Monday on the US deficit as it has unexpectedly surged this year. The piece (link here) references US economist Brett Ryan’s piece explaining that most of the deficit increase should be temporary due to delays in tax receipts. Much of California got an extension in filing their tax receipts until October 16th because of severe winter storms. So until we see that we wont really know whether the fiscal impulse has indeed turned notably positive or if, as is our current expectation, its just a timing issue. I am however getting more clients ask me if the US is increasing fiscal spending by stealth. At the moment I don’t think this is the case over and above our forecast from the start of the year, which is for a deficit not that different to last year, albeit still large. A big one to watch.
In terms of data, the lead stories yesterday were the ISM and JOLTS data for July and June respectively, which didn’t dent the soft-landing narrative for the US economy but still hinted at only a gradual reduction in labour market tightness.
The headline ISM manufacturing result did slip in July, with the ISM manufacturing index disappointing at 46.4 (vs 46.9 expected). However, there were encouraging snippets of inflation-related data, including the ISM prices paid which rose less than expected to 42.6 (vs 44.0 expected). Resilience in new orders were likewise evident, rising from 45.6 in June to 47.3, although remaining in contractionary territory. The employment component fell from 48.1 in June to 44.4 though, pushing the index further into contractionary territory.
Additionally, the slight downside surprise in the JOLTS job opening at +9582k (vs +9600k expected) similarly spoke of a more tepid labour market after falling to its lowest level since April 2021. Job openings are still historically high though. Lastly, the quits rate dropped down two-tenths to 2.4%, after a shock increase to 2.6% in the May release. The closely followed private quits rate also fell two tenths to 2.7% again reversing a surprise increase the month before. Another suite of labour market data is due today, with the release of ADP private-sector jobs for July ahead of payrolls on Friday.
However, with a lot of data between now and November, and Fedspeak emphasising data dependency, markets didn’t move much at the front end after the numbers with the long end buffeted instead by the supply outlook. Investors are pricing a nearly 1 in 5 chance of a 25bp rate hike at either of the next two Fed meetings. Yesterday, the balance shifted slightly to put slightly more weight on November, with the expected terminal rate at the end of the meeting expected to be 5.414%.
Across the Atlantic, the German labour market also remained tight, with the July unemployment rate falling to 5.6% from 5.7% in June (vs 5.7% expected), and unemployment claims decreasing -4k (vs +20k expected). The overall Eurozone unemployment rate fell from 6.5% to 6.4% (vs 6.5 expected). The better-than-expected results spoke to a still robust labour market, and with the ECB now data dependent, European overnight index swaps priced in nearly a 62% chance of another 25bps hike by year-end, up slightly from the previous session. Against this backdrop, 10yr bunds sold off, as yields rose +6.5bps. Over the channel in the UK, gilts underperformed, as 10yr yields rose +9.0bps ahead of the BoE meeting on Thursday notwithstanding weak economic data including the UK Lloyds business barometer, which fell from 37 to 31. Basically it was a day of rising western global bond yields.
Turning our attention away from fixed income to equities, the S&P 500 broke its two-day streak of gains to finish down -0.27% following mixed company earnings and possibly the weaker ISM. At the industry level, autos (-1.9%), telecoms (-1.4%), utilities (-1.3%) and consumer discretionary (-1.0%) all lagged. The latter was impacted by Uber (-5.68%) missing on Q2 revenue expectations. On the flipside, capital goods outperformed, up +0.6% following strong Q2 earnings by lead American construction company Caterpillar (+8.85%). The NASDAQ underperformed, falling back -0.43%. After the US close semiconductor producer AMD (up +2.7% in after-market trading) beat earnings expectations and described the PC chip market as having mostly recovered with customers having worked through excess inventory. The company expects to hit their initial full year guidance on surging AI demand. In Europe, the STOXX 600 earlier slipped, down -0.89%, after negative Q2 updates and cautious forward outlooks from top European firms such as BMW (-5.39%), DHL Group (-4.87%) and Daimler (-2.40%).
In terms of other notable data releases, we had the Dallas Fed Services Activity, which posted at -4.2, an increase from -8.2 in June. The final US manufacturing PMI result for July was unchanged from the flash result, at 49.0, increasing from 46.3 prior. Finally, the final euro area PMI manufacturing result for July was unchanged at 42.7.
Early morning data today showed that South Korea’s consumer price growth slowed for the sixth consecutive month, rising +2.3% y/y in July (v/s +2.4% expected) on the back of lower oil prices. It followed a +2.7% increase in June, and marks the lowest advance since June 2021.
After a data heavy day yesterday, we have only the US July ADP report as the major data release to look forward to today. But watch out for the refunding announcement. Key company earnings include semiconductor firm Qualcomm, as well as Teva, Shopify, PayPal, Occidental Petroleum, Equinix, Kraft Heinz, DoorDash, Albemarle, MGM Resorts, Zillow, and Etsy.