Marketmind: Markets shrug off shocking US credit downgrade

The markets received an unexpected jolt as Fitch downgraded the U.S. government's credit rating by one notch to AA+ from AAA, citing concerns over governance and mounting U.S. debt.

In response to this downgrade, the U.S. government swiftly retaliated, countering the move, especially after the Biden administration managed to avert a debt ceiling crisis by reaching a deal with conservative lawmakers a few months ago.

Surprisingly, the market reaction to this development has been relatively subdued. While U.S. Treasury yields eased slightly, investors paradoxically sought refuge in U.S. sovereign debt, leading to a rise in the dollar against major currencies.

Equities, on the other hand, experienced a somewhat more pronounced reaction, with S&P 500 and Nasdaq futures declining by around 0.5% each. Meanwhile, Japan's Nikkei witnessed a more significant setback, suffering a 1.8% drop, although it had been hovering near post-Bubble highs in the preceding two months.

Chinese markets also took a considerable hit, particularly with Hong Kong's Hang Seng declining by 2%. Notably, these markets had been supported by diminishing hopes for substantial economic stimulus from Beijing, amplifying the impact of the credit rating downgrade.

Amidst these developments, China's post-pandemic economic recovery appears increasingly shaky, as evident from the recent data reflecting pessimism in both factory and services activities.

As the day unfolds, several key developments are poised to influence the market sentiment. Notably, market participants will keenly await the U.S. July ADP report, as well as monitor Swiss PMI and consumer confidence indicators. Additionally, the international tourism arrivals data from Spain could also play a role in shaping market dynamics on Wednesday.