The U.S. stock market experienced a significant decline as a surprise debt downgrade and strong jobs data raised concerns over higher interest rates. Global markets also saw a sell-off, mirroring Wall Street’s downturn.
The U.S. stock market saw its most substantial one-day decline in months, joining a global sell-off. The surprise downgrade of the country’s debt rating by Fitch, along with stronger-than-expected jobs data, has raised concerns about the potential for an extended period of higher interest rates, which could negatively impact risky assets.
Wall Street’s Decline
The S&P 500, a benchmark index for Wall Street, fell 1.4% on Wednesday, marking its most substantial daily drop since late April. The tech-focused Nasdaq Composite experienced an even more significant decline of 2.2%, the largest since February.
Fitch’s Credit Rating Downgrade
Late on Tuesday, credit agency Fitch downgraded the U.S. credit rating from triple A to double A plus. The downgrade was attributed to the mounting government debt burden and the recent debt ceiling standoff that threatened a government default. Fitch had previously signaled the possibility of a downgrade in May, but few analysts expected significant market shifts as a result. Nevertheless, this is only the second such warning from a major rating agency since Standard & Poor’s downgrade in 2011, which was also associated with a tense debt ceiling fight.
Rising Yields and Investor Perception
One notable difference between the 2011 downgrade and the current situation is that back then, yields on U.S. bonds fell as investors sought safety, driving up bond prices and lowering yields. However, this time, yields are rising, which could indicate that investors perceive greater risk. The U.S. narrowly avoided a government default in June, and Fitch’s move, coupled with the news of increased bond sales to cover the deficit, pushed yields on 10-year Treasuries to almost 4.13%, the highest since early November.
Impact on the Stock Market
The rise in yields above 4% is significant for market watchers, as the 10-year benchmark had not sustained such levels since 2007. While Wednesday’s move in Treasuries wasn’t dramatic, it helped solidify yields above 4%, a level that could influence stock market performance. When yields were above 4% in late 2022, the stock market was 20% lower, signaling potential challenges for the current expensive stock market to continue its rally.
The Dollar’s Response
Despite the stock market drop and rising yields, the dollar held firm, rising 0.3% on the day. The strength of the dollar index reflects the perception that the U.S. is still a relatively safe haven for investors, even with the debt downgrade.
Strong Jobs Data and Interest Rates
New data on the U.S. labor market showed that private sector employment increased significantly in July, exceeding analysts’ expectations. This robust job growth has contributed to the view that the U.S. economy might achieve a “soft landing.” However, it also means that interest rates may not quickly return to lower levels.
The sell-off on Wall Street was mirrored by similar weakness in European and Asian markets. European stocks, represented by the Stoxx Europe 600 index, closed 1.4% lower. In Asia, Hong Kong’s Hang Seng index declined 2.5%, and Japan’s Topix fell 1.5%. London’s FTSE 100 also ended down 1.4%, just ahead of the Bank of England’s expected increase in its benchmark bank rate to 5.25%.
The surprise downgrade of the U.S. debt rating by Fitch and strong jobs data have contributed to the decline in U.S. stocks and sparked a global sell-off. Rising yields and uncertainty about interest rates have raised concerns among investors, leading to market volatility across the world.