A selloff gripped the stock market on Wednesday as the Nasdaq Composite suffered its worst day since February. The downturn was triggered by Fitch Ratings’ decision to downgrade the long-term rating for the U.S. from AAA to AA+, citing concerns about the expected fiscal deterioration over the next three years.
This move fueled risk-off sentiment, causing the tech-heavy index to plummet by 2.17% and the S&P 500 to retreat by 1.38%. Leading the declines were technology stocks, including major players like Amazon, Alphabet, and Microsoft, which saw their share prices drop by more than 2% each. The 10-year Treasury yield also surged to its highest level since November, further exacerbating the sell-off.
Despite the rating downgrade, some experts viewed the market correction as a natural part of the market cycle after an extended period of growth. The economy demonstrated resilience, and conditions were notably different compared to the last time the U.S. experienced a rating downgrade. Earnings season proved robust, with approximately 82% of S&P 500 companies reporting positive surprises.
While the downgrade did impact investor sentiment, many remained optimistic about the overall economic outlook and market trends, considering the selloff as a constructive rotation rather than a sign of an imminent market downturn.
Data by Bloomberg
On Wednesday, the overall stock market experienced a decline of 1.38%. Among the sectors, Consumer Staples showed a slight increase of 0.25%, while Health Care gained 0.06%. On the other hand, the Communication Services sector suffered the most significant drop of 2.07%, closely followed by Information Technology, which declined by 2.59%. Other sectors that experienced losses were Energy (-1.34%), Materials (-1.23%), Consumer Discretionary (-1.84%), Industrials (-1.08%), Financials (-0.89%), Real Estate (-0.44%), and Utilities (-0.01%).
Major Pair Movement
The dollar index surged by 0.5% as a safe-haven response to Fitch’s U.S. credit downgrade and positive ADP data boosted investor confidence. Despite stock market losses leading to a decline in Treasury yields, traders awaited upcoming ISM non-manufacturing and employment reports, considered better indicators of economic growth and the labor market. The chances of further Fed rate hikes remained low, and the rebound in Treasury yields was driven by higher longer-term tenors due to the Treasury’s unexpected borrowing plans. Although Fitch’s credit downgrade and increased borrowing estimates created concerns, portfolio managers were less likely to exit Treasury holdings due to the continued backing of the U.S. government.
EUR/USD experienced a 0.34% decline, approaching the uptrend line from May, reflecting worries about economic weaknesses in Germany and China versus hopes for a soft landing in the U.S. Market expectations showed limited possibilities of further ECB hikes and a higher peak for the Fed’s rates. USD/JPY initially dropped on haven yen gains following the Fitch news but later recovered as JGB yields rose despite BoJ buying.
Sterling faced losses earlier but recovered slightly after a poll showing lower UK public inflation expectations. A 25bp hike was favored over a 50bp one in the upcoming BoE meeting due to higher inflation levels in the UK compared to the ECB and the Fed. The Australian dollar and yuan both depreciated against the dollar due to risk-off sentiment and uncertainty about Chinese economic stimulus plans.
Looking ahead, investors were awaiting several key economic reports on Thursday, including Challenger layoffs, jobless claims, ULC, and factory orders, as a prelude to Friday’s jobs report. These data points were expected to provide further insights into the state of the economy and may impact market sentiment and the performance of various currencies.
Picks of the Day Analysis
EUR/USD (4 Hours)
EUR/USD Breaks Key Support Levels Amid Strong US Dollar Performance and Risk Aversion
The EUR/USD pair experienced a significant drop below key support levels, reaching 1.0919, the lowest since July 7, due to the US dollar’s robust performance and risk aversion triggered by Fitch’s downgrade of the US sovereign rating. Despite initial gains after the announcement, the pair resumed its downward trend as the US dollar strengthened, breaking below 1.0960.
The US Dollar Index rose to a four-week high above 102.50 following positive labor market data, with private employment increasing by 324K according to ADP. More US employment data is expected, making it crucial for market sentiment. On the horizon, Germany’s trade balance data, service PMIs, Eurostat’s Producer Price Index, and the Bank of England’s decision will be critical for the Euro’s performance.
According to technical analysis, the EUR/USD moved slightly lower on Wednesday and reached the lower band of the Bollinger Bands. Currently, the price is slightly above the lower band of the Bollinger Bands. The Relative Strength Index (RSI) currently stands at 34, suggesting that the EUR/USD is starting to move lower, indicating a bearish mode.
Resistance: 1.1038, 1.1121
Support: 1.0915, 1.0839
XAU/USD (4 Hours)
XAU/USD Faces Volatility Amid Mixed Market Sentiment and Encouraging US Data
The XAU/USD pair experienced volatility as market sentiment fluctuated and encouraging US data supported the US Dollar. Peaking at $1,954.81 per troy ounce, the pair currently trades around $1,935. The dismal market mood, driven by Fitch’s US debt rating downgrade and debt ceiling turmoil, contributed to risk-off sentiment, leading to red global indexes and a rally in government bond yields.
However, the US Dollar recovered its poise after the release of positive ADP Employment Change data, showing the private sector added 324K new job positions in July, surpassing market expectations. As the labor market remains tight, speculation grows about further monetary tightening by the Federal Reserve, impacting the XAU/USD pair’s performance amid mixed outlooks and cautious optimism.
According to technical analysis, the XAU/USD fell on Wednesday and reached the lower band of the Bollinger Bands. Currently, the price is moving slightly above the lower band of the Bollinger Bands. The Relative Strength Index (RSI) currently stands at 36, which suggests that the XAU/USD pair is slightly bearish.
Resistance: $1,945, $1,963
Support: $1,930, $1,912
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