Wednesday, August 2, 2023

Capital Markets: "Fitch Roils Markets"

From Marc Chandler at Bannockburn Global Forex:

Overview: Late yesterday, on the eve of the quarterly refunding announcement, Fitch cut the US rating to AA+ from AAA, citing project fiscal deterioration over the next few years and "the erosion of governance". S&P also has the US as an AA+ credit. Ironically, many observers who have been critical of the US monetary and fiscal policies, like former Treasury Secretary Summers and El-Erian, were also critical of Fitch's decision. The US 30-year yield reached its highest level since last November before Fitch's announcement. It and the 10-year yield are slightly firmer today, ahead of the Treasury's refunding announcement an hour before the US equity markets begin their day session. Note that Moody's continues to rate the US as AAA, and asset managers have idiosyncratic rules of what to do with split ratings.  The ECB takes the highest rating in determining haircuts for collateral.  We suspect the Fitch's decision is more symbolic and embarrassing than having a sustained adverse impact. The dollar is mixed but mostly firmer against the G10 currencies, but the Japanese yen. Emerging market currencies are softer except for the Czech koruna and Polish zloty.

Equities are most impacted today. A couple large bourses in Asia Pacific, including the Nikkei, Hang Seng were off more than 2%, while most of the others fell by more than 1%. Europe's Stoxx 600 is down about 1.35%, which is sustained would be the largest drop in nearly a month. US index futures are 0.6% (Dow) to 1.1% (NASDAQ) lower. Note that when S&P downgraded the US in 2011 the main US indices plummeted 5-7%. Asia Pacific yields played catch-up after the rise in North America yesterday, but European yields are mostly 3-4 bp lower, though UK 10-year Gilt yield is slightly firmer. The US 10-year yield is little changed but holding above 4.0%. Gold is hovering around $1950, and the five-day moving average is set to cross below the 20-day moving average for the first time in three weeks. Meanwhile, oil is extending its recent gains and September WTI traded above $82 a barrel, helped by a dramatic fall in US crude inventories (API reportedly estimated a 15.4 mln barrel drawdown, which is confirmed would be the largest in at least 40 years). Separately, estimates suggest OPEC+ output fell its lowest since 2020 last month.

Asia Pacific
The local session featured a sell-off in stocks and bonds in response to yesterday's US developments