Fitch lowers US credit rating❗

USD and indices dropped after Fitch Ratings downgraded US economy

Big news hit the markets yesterday after the close of the Wall Street session. Fitch Ratings announced a downgrade to US credit rating - from AAA to AA+. This did not come entirely out of the blue as Fitch put the US economy on negative watch back in May, citing debt ceiling disagreements and overall deteriorating fiscal situation as a reason. Nevertheless, the move is somewhat puzzling as debt ceiling agreement has been ultimately reached and US default was avoided.

This is important especially for bonds as some funds are required to hold only AAA-rated bonds, meaning that downgrade could trigger a sell-off on US Treasury market. However, Fitch is not the only major ratings agency and for a bigger sell-off to be triggered on bond markets, two others would also likely need to downgrade (S&P and Moody's). However, S&P has already downgraded US credit from top-tier rating back in 2011 and has not upgraded it since.

Market reaction has been rather subdued. EURUSD jumped higher and climbed above the 1.10 mark but has since given back some gains. USDJPY pulled back and moved back below the 143.00 mark while S&P 500 futures (US500) opened overnight with an around 0.4% bearish price gap. We have also observed increased safe haven flows into gold… and Treasuries, following Fitch downgrade.

US500 gapped lower following Fitch downgrade but bears have not yet managed to break below the 4,580 pts support zone. Source: xStation5