Do US Markets Have a Case of the Moody Blues?

• Moody's downgraded the US sovereign debt credit rating last Friday due to concerns about the nations growing “debt pile”. 

• As expected, US Treasury yields jumped while global stock indexes fell to start the week. Mostly. 

• Meanwhile, the US dollar index was under pressure, a somewhat unexpected move but possibly indicating more about the US standing in the global game as a whole. 

Last Friday afternoon, after markets had shut down for the day, the financial services company Moody’s “downgraded the U.S. sovereign credit rating due to concerns about the nation’s growing $36 trillion debt pile”^[i]. According to a Reuters piece, Moody’s first gave the US its “pristine” Aaa” rating back in 1919 and was the last of the three major credit agencies to downgrade the US rating. For the record, Moody’s took the US down to Aa1 due to “wider fiscal deficits and higher interest payments”. The company stated, “Successive US administrations and Congress have failed on measures to reverse the trend of large annual fiscal deficits and growing interests costs”. In the grand scheme of things, what does all this mean? To begin with, theoretically it could “complicate” the US president’s^[ii] mantra of cutting taxes. This also gives the US Federal Open Market Committee new ammunition to actually raise interest rates, theoretically strengthening the US dollar. The initial market response was for yields on US Treasury bonds to jump higher, casting a weekend-long shadow over the open to global equity markets this week. With that in mind, let's take a look at the financial sectors early Monday morning.

US Stock Index Futures: 

As expected, US stock index futures were lower to start the week. The pre-dawn Barchart Futures Market Heat Map shows Indices showing a cumulative loss of 1.38%, trailing only Energies for title of “Sector with the Largest Loss”.  It will be interesting to see what happens with US stock indexes as the day unfolds given European markets are lower across the board as of this writing and Asian markets closed mostly lower. What was the outlier in Asia, you ask? Why, it just happened to be China's Shanghai Composite. In other news, anytime we look at global equity markets it brings up the Chicken and the Egg Debate: Which moves first, global stock markets or the US? In this case, it makes more sense for global stock indexes to lead the way given the announcement of Moody's move came after US markets closed last Friday. As of this writing:

• Dow Jones Industrial futures (YMM25) were off 0.8%
• S&P 500 futures (ESM25) were down 1.3%
• And Nasdaq futures (NQM25) were showing a loss of 1.6%

US Treasury Futures: 

As noted in the opening, Moody’s downgrade could give the US Federal Open Market Committee another reason to raise rates rather than cut over the coming months. The initial jump in bond yields indicated investors/traders were thinking along the same line. Overnight through early Monday morning saw the yield on US 30-year bonds rise to 5.03% while the futures market fell to a low of 111-21. This brings the previous 4-month low of 110-19 back into sight as the end of May grows larger on the horizon. From a technical point of view (for whatever that’s worth), a new 4-month low on the long-term continuous monthly chart would extend the series of lower highs and lower lows: The basic definition of a long-term downtrend. If we apply the first premise of technical analysis (Market action discounts everything) then the US bond market is telling us rate hikes are more likely than rate cuts. As of this writing: 

• US 30-year T-Bond futures (ZBM25) were down 1.4%
• US 10-year T-Note futures (ZNM25) were down 0.6%

US Dollar Index:

The first two financial market sectors fit the expected scenario with the expectation of higher US interest rates likely to push US stock indexes lower while rallying US Treasury yields and dropping prices. But what about the dollar? Theoretically, it should firm as well, based on the idea the Fed will raise rates to combat inflation. However, that isn’t what we are seeing to start the week as the greenback weakened by as much as 1.03 overnight through early Monday morning. (A side note: I continue to find it interesting the Barchart Futures Market Heat Map lists Bitcoin futures as a currency. That’s similar to claiming Natural Gas is a safe-haven market.) There seems to be other forces in play with the US dollar, most notably the idea the rest of the world has given up on the US as a serious player in the global game. As of this writing: 

• The US dollar index ($DXY) was down 0.9%
• The Euro (EURUSD) was up 1.0%
• The Canadian dollar (CADUSD) was up 0.1%
• The Mexican Peso (MXNUSD) was unchanged
• The Russian ruble (RUBUSD) was up 1.0%
   

^[i] From this Reuters’ piece: (LINK)

^[ii] As always, the US president seems to have posted something to social media on the subject. Back in 2012, when the US was facing credit downgrades during the Obama administration, his then Twitter account showed a post that read, “You get what you vote for. US credit rating is about to be downgraded once again…”