Fitch's Downgrade to the U.S. Treasury Is More Like a Political Declaration

U.S. stocks pulled back last week due to:

• Fitch downgraded U.S. debt;

• The Treasury Department announced that it will sell more U.S. debt in the second half of the year.

$S&P 500(.SPX)$

Weekly chart

These two reasons made $USD Index(USDindex.FOREX)$and $Micro 10-Year Yield - main 2308(10Ymain)$ rise, coupled with $Apple(AAPL)$ s earnings report, which was lower than expected, which brought down the stock market and commodities.

These are emergencies that no one can predict in advance. But it is predictable that the effects of these events will fade soon, DXY and UST10Y will return to the downward trajectory, and US stocks will resume their rise.

Because Fitch's decision to downgrade the U.S. Treasury is a bit odd:

• Fitch believes that the debt ceiling dispute between the two parties in the United States has hurt the credibility of the United States and its management has deteriorated. But if so, Fitch should downgrade the rating when the debt ceiling is discussed, not now;

• Fitch believes that the US debt is high, the deficit will rise sharply, and the leverage ratio far exceeds the maximum rating requirement. Fitch also believes that the U.S. economy has a higher probability of recession from the fourth quarter of this year to the first quarter of next year. But the market has long been aware of this situation. And it is the rise in the U.S. deficit this year that has maintained the strength of the U.S. economy this year;

• The term premium of U.S. long-term bonds is declining, showing that the market has strong demand for U.S. bonds. In other words, the market is very confident about U.S. debt.
  
  

Therefore, this downgrade by Fitch is different from the historic U.S. debt downgrade in 2011. This time it is more like a political declaration. If this downgrade is a criticism of the Democratic Party, but we all know that the debt ceiling crisis was actually caused by the Republican Party trying to use the debt ceiling discussion to play political football, then Fitch appears to be biased.

If Fitch's downgrade of the U.S. debt rating is just expressing its own political opinions and not providing more new information, then the market should not be too troubled. Conversely, if the market believes that the downgrade of the U.S. bond rating will increase the risk premium, then the U.S. bond yield will instead fall due to the decline in risk appetite, or the market demand for U.S. bonds will instead increase.

Fitch had warned of the downgrade in May. If Fitch’s attitude toward U.S. politics and concerns about U.S. economic recession reflected in this rating downgrade will accelerate the end of the Fed’s tightening cycle, then U.S. bond yields will fall (U.S. bond prices will rise), and risk appetite will pick up (U.S. stocks new highs) the probability will rise further.

Of course, the current market needs some time to digest everything that has just happened, as well as the logic of the above game.

It is worth mentioning that the main theme of the current market is still not convinced that the current US stock market is a bull market. This can be seen when $iShares Russell 2000 ETF(IWM)$ pulls back slightly, and unprofitable small-cap stocks immediately drop sharply.

This is a good thing for U.S. stocks. The more people are in disbielf, the stronger the motivation for U.S. stocks to rise in the later period. The super bull market of 2000/2001 seemed easy afterwards, but those who have experienced it know that this one-and-a-half-year-long bull market was also completed along with the doubts along the way.

The market is not a straight line at any time, just be patient!