Wall Street Tumbles! Futures Lower

August 2, 2023

Good morning.

Wall Street futures tumbled on Wednesday after rating agency Fitch’s move to downgrade the U.S. government’s credit rating sparked a flight to safety in global financial markets.

Fitch Ratings unexpectedly downgraded the United States’ sovereign rating to AA+ from AAA late Tuesday, citing potential fiscal deterioration over the next three years and concerns about repeated down-to-the-wire debt ceiling negotiations that could threaten the government’s ability to meet its financial obligations.

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.

Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, the lower a borrower’s rating, the higher its financing costs.

In a previous debt ceiling crisis in 2011, Standard & Poor’s cut the top “AAA” rating by one notch a few days after a debt ceiling deal, citing political polarization and insufficient steps to right the nation’s fiscal outlook. Its rating is still “AA-plus” – its second highest. After that downgrade, U.S. stocks tumbled and the impact of the rating cut was felt across global stock markets, which were in the throes of the euro zone financial meltdown.

Today, investors await the ADP National Employment report for July that could offer more clues on the domestic labor market, ahead of much awaited non-farm payrolls data due on Friday.

WTI crude futures jumped more than 1% to above $82 per barrel. Gold held near $1,950 an ounce while the yield on the US 10-year Treasury note was around 4.03%.

The downgrade of the US rating by Fitch will add uncertainty to market conditions today as investors assess the impact of this news.

Have a great day.