[New York Stock Market] US Credit Rating Downgrade Triggers Sharp Decline... Nasdaq Down 2.17%

The three major indices of the U.S. New York stock market all closed lower on the 2nd (local time) as risk aversion sentiment rose following Fitch's downgrade of the U.S. national credit rating. The U.S. private employment data released before the opening, which greatly exceeded expectations, also weighed on investor sentiment. As risk assets such as stocks declined, oil prices also fell.

On that day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 35,282.52, down 348.16 points (0.98%) from the previous session. The large-cap focused S&P 500 index fell 63.34 points (1.38%) to 4,513.39, and the tech-heavy Nasdaq index dropped 310.47 points (2.17%) to 13,973.45. The Nasdaq's decline was the largest since February. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's "fear index," surged more than 15%, surpassing the 16 level.

Among the S&P 500 sectors, nine out of eleven sectors declined, excluding healthcare and consumer staples. In particular, technology and telecommunications stocks fell more than 2%. Despite better-than-expected earnings, U.S. semiconductor company AMD dropped over 7% due to declining sales. Semiconductor stocks showed notable weakness, with Nvidia sliding 4.78% and Intel falling 3.97%. SolarEdge Technologies plunged nearly 19% due to poor earnings. Apple and Amazon, which are scheduled to report earnings after the market close on the 3rd, fell 1.55% and 2.64%, respectively. Chinese-related stocks such as JD.com and Alibaba also weakened after news emerged that China may limit smartphone usage for minors to under two hours. On the other hand, CVS Health rose more than 3% on strong earnings.

[Image source=Reuters Yonhap News]

Investors closely monitored the impact of Fitch's downgrade of the U.S. credit rating from 'AAA' to 'AA+' late the previous day, newly released economic indicators, and corporate earnings. Following declines in Asian and European markets after Fitch's downgrade decision, the New York stock market also remained weak throughout the trading session. This is the first time in 12 years since S&P in 2011 that a major international credit rating agency has downgraded the U.S. credit rating. Fitch cited political conflicts over raising the federal government's debt ceiling, fiscal deterioration, and national debt burden as reasons for the downgrade.

However, despite the decline on this day, Wall Street's general assessment is that the impact on the market will be limited. Jamie Dimon, CEO of JP Morgan Chase, known as the "Emperor of Wall Street," emphasized the safety of U.S. Treasury bonds in an interview with CNBC, saying, "It doesn't really matter," and "The market decides. It's not the rating agencies." He criticized Fitch's downgrade decision as "nonsense," pointing out, "There are many countries with higher ratings than us like AAA, but they are under the U.S. corporate military system. It's somewhat ridiculous that they have AAA instead of the U.S."

On the same day, U.S. Treasury Secretary Janet Yellen also criticized Fitch's credit rating downgrade as a "flawed and inappropriate decision." Attending an event in Virginia, she said, "Fitch's decision is puzzling when viewed against the economic strength of the U.S. we see," and "It does not change what we already know?that U.S. Treasuries are the safest and most liquid assets in the world and that the U.S. economy is fundamentally strong."

The ripple effects confirmed in the New York bond and foreign exchange markets on this day were relatively limited. The Dollar Index, which shows the value of the dollar against six major currencies, continued its strength. U.S. Treasury yields showed mixed trends with relatively small fluctuations. There was no rapid selling or buying pressure to be concerned about. UOB Group analyzed, "U.S. Treasuries remain the most liquid and stable assets, so the possibility of massive selling by investors is low," adding, "Diversification into non-dollar assets is more due to geopolitical risks than the downgrade." The 10-year Treasury yield briefly rose to 4.12% during the session, the highest level since November last year.

Ed Moya, senior market analyst at OANDA, said, "The timing of the downgrade caught everyone off guard," and "Stock traders are using this rapid rise in rates and anxiety as an opportunity to profit ahead of Apple and Amazon's earnings." Mona Mahajan, senior investment strategist at Edward Jones, also said, "Investors can use Fitch's downgrade as a reason to profit," adding, "This decision does not affect our fundamental view of the economy and the market." Brook May, managing partner at Evans Maywells, said, "(The downgrade is) disappointing, but I don't think it will have a meaningful short-term impact on the economy," diagnosing, "It is merely a warning to Washington politics."

Important employment data that could affect the Federal Reserve's (Fed) monetary policy decisions are also being released. According to Automatic Data Processing (ADP), U.S. private sector employment in July increased by 324,000 compared to the previous month, far exceeding the Dow Jones consensus estimate of 175,000. This signals that the labor market overheating has not cooled despite the Fed's cumulative interest rate hikes, contrasting with the previous day's Labor Department Job Openings and Labor Turnover Survey (JOLTS), which showed a gradual slowdown. The number of job openings announced the previous day was the lowest in over two years, indicating a gradual cooling of the labor market.

Accordingly, market attention is focused on the nonfarm payroll report to be released by the U.S. Labor Department on the 4th. ADP private employment, typically released just before the payroll report, is considered a leading indicator, but its trend does not always align. Wall Street estimates that nonfarm payrolls increased by around 200,000 in July. If the nonfarm payroll report shows a slowdown, the recently spreading market expectations for early tightening could strengthen. Conversely, if it exceeds market expectations, caution regarding Fed tightening could rise again.

Currently, the market largely expects the Fed to hold rates steady in September, supported by recent soft landing hopes. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market on the morning of this day priced in over an 82% chance that the Fed will hold rates at the next September FOMC meeting. Although the Fed's June dot plot indicated the possibility of one more rate hike this year, the market currently favors a hold scenario through year-end. Meanwhile, the Federal Reserve Bank of Kansas City announced on this day that it appointed Jeffrey Schmid as the new president, replacing Esther George who retired earlier this year. Schmid, from Nebraska, has over 40 years of experience in banking and regulatory work and was instrumental in founding Omaha Bank.

Earnings reports are also ongoing. According to FactSet, about 82% of S&P 500 companies that have reported so far have beaten expectations. Apple and Amazon, the largest by market capitalization, are scheduled to report next. Their earnings are expected to be key factors influencing the New York stock market trend. Last week, strong earnings from Google Alphabet and Meta Platforms helped drive the stock market rally.

International oil prices fell due to the strong dollar and risk aversion sentiment following the U.S. credit rating downgrade. On the New York Mercantile Exchange, September delivery West Texas Intermediate (WTI) crude oil closed at $79.49 per barrel, down $1.88 (2.31%) from the previous session.