Fitch's downgrade floods the news, Wall Street institutions speak out, what will happen to US stocks, the US dollar, and US bonds?

Fitch's downgrade of the US sovereign credit rating has caused a stir.

After Fitch's action, Wall Street News noted that another international credit rating agency, Moody's, did not take any action on the US credit rating. On Wednesday, August 2nd, Moody's only adjustment to the sovereign credit ratings of various countries was to downgrade Nigeria's rating to Caa2, with a negative outlook. Moody's remains the only one among the three major international rating agencies that has not downgraded the US rating.

Wall Street News previously mentioned that compared to the "earthquake" in the market caused by Standard & Poor's downgrade of the US credit rating in 2011, the market reaction this time was relatively calm. However, the hidden risks of US debt have once again caught the attention of Wall Street.

Former US Treasury Secretary and economist Summers commented that there are indeed many reasons to be concerned about the long-term path of the US fiscal deficit. However, the US government's ability to repay its debts is not a problem. He criticized Fitch's downgrade of the US credit rating.

Wall Street institutions have voiced their opinions. Many Wall Street insiders believe that Fitch's downgrade will not have a substantial impact on the market.

No substantial impact on US stocks, bonds, and foreign exchange. Dimon says the impact is not significant.

Jamie Dimon, CEO of JPMorgan Chase, the largest bank in the United States, commented that the impact of Fitch's downgrade of the US rating is not as significant as it seems. Moody's only pointed out some issues that everyone already knew. The US credit condition is still good and should have the highest rating globally.

Dimon stated that the US economy is in good condition, supported by the strength of consumers and businesses, low unemployment rates, and a healthy balance sheet. However, the economy may still face "unexpected events." Dimon's biggest concerns are geopolitical risks related to the Russia-Ukraine conflict and the Federal Reserve's balance sheet reduction, also known as quantitative tightening (QT).

Mohamed El-Erian, Chief Economist at Allianz, called Fitch's downgrade of the US rating "strange." He expects it will not affect the market.

Goldman Sachs economist Alec Phillips believes that Fitch's downgrade mainly reflects management and medium-term fiscal challenges and does not reflect new fiscal information. The downgrade will not have any direct impact on the financial markets because the major holders of US Treasury bonds are unlikely to be forced to sell them due to rating changes.

Joachim Klement, Head of Strategy, Accounting, and Sustainable Development at Liberum Capital, stated that Fitch's downgrade will not have a substantial impact on the stock market, US Treasury bonds, and the US dollar. He compared the downgrade to a storm in a teacup, saying that the downgrade is not without reason, but there is no reason to sell US Treasury bonds because there are no alternatives in the global bond market, and there is no significant risk of default in the next ten years.

It won't repeat the sharp decline in US stocks after S&P's downgrade in 2011. The pullback is only temporary.

Some people have compared this downgrade to the market reaction after Standard & Poor's downgrade of the US rating in August 2011.

Chris Harvey, Head of Stock Strategy at Wells Fargo, commented that due to factors such as a completely different macro environment, Fitch's downgrade will not have the same impact on the financial markets as Standard & Poor's downgrade of the US rating. After the downgrade by Standard & Poor's, the market entered a risk-averse mode. The stock market adjusted, and credit spreads widened significantly while interest rates declined. Currently, investment-grade credit spreads have reached their lowest point this year, and interest rates have been climbing since earlier. The S&P 500 index has already risen by 20% this year, and many investors, as well as the Federal Reserve, expected interest rate cuts at the beginning of the year. Therefore, any stock market pullback is only temporary and relatively small.

Manish Kabra, the head of US stock strategy at Societe Generale, stated that after the 2011 downgrade by S&P, the market quickly reacted with significant risk aversion. However, this time the nominal growth prospects are much higher than in 2011, so he expects any profit-taking to be short-lived. If US bond yields can decline, it will signal a closer end to significant risk aversion. Before buying stocks, most institutional investors hope to see the yield curve turn positive, and Societe Generale also hopes to see this significant change before upgrading their stock rating to "buy".

Economic slowdown risk, not the downgrade, is the main driver of the stock market decline

Some analysts pointed out that there were already downside risks in the market.

Alexandre Baradez, Chief Market Analyst at IG in Paris, commented that people would feel that the market is looking for an excuse to take profits. He suspects that what the market is currently pricing in is not the downgrade by Fitch, but the increased risk of an economic slowdown. After the release of some data by the two major economies this week, a downward trend began on Tuesday, indicating that the market is actually reflecting the risk of an economic slowdown rather than the Fitch downgrade.

Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management LLP, said that overall, the impact of the Fitch downgrade is not significant, but it reminds people that the US Treasury will issue a large amount of debt, which may put pressure on global markets if it leads to a steepening of the yield curve and an increase in the discount rate of long-term cash flows. In recent weeks, investors have been betting on the prospect of the US economy neither overheating nor cooling down, causing previously firm bears to capitulate. However, as the market pricing begins to reflect this perfect state of the economy, it becomes more susceptible to corrective shocks.

The US dollar may weaken for a few days, but there will be no loss

Some analysts mentioned the potential impact on the US dollar.

Carol Kong, currency strategist at Commonwealth Bank of Australia, believes that if the market believes that the downgrade will weaken the US dollar's reserve currency status, the US dollar may weaken in the coming months. However, he expects that the US dollar will not suffer any losses. Credit ratings are usually not the main medium-term driving factor for currencies.

Andrew Ticehurst, interest rate strategist at Nomura, said that the performance of the US dollar may be weaker compared to other major currencies such as the euro and the yen. If the Fitch downgrade leads to widespread risk aversion, then high-beta currencies in Asia will naturally perform poorly. And if there are some defensive price actions across asset classes due to the Fitch downgrade, money may flow into defensive assets, including highly liquid US Treasury bonds.