S&P 500 Falls Following Downgrade of US Credit Rating
On Friday, 16 May, after markets had closed, Moody?s Ratings announced a downgrade of the long-term sovereign credit rating of the United States from the highest level of Aaa to Aa1. The key reasons cited by Moody?s were the rising national debt and interest payments, as well as expectations of a further increase in the budget deficit. Notably:
→ The downgrade was hardly a surprise. A similar move was made by Standard & Poor?s back in 2011, while Fitch Ratings followed suit in August 2023.
→ The official response may be seen as reassuring for market participants. US Treasury Secretary Scott Bessent played down concerns about the downgrade in an interview with NBC News, calling credit ratings ?lagging indicators? and placing the blame on the previous administration.
→ Despite the downgrade, Moody?s acknowledged the US dollar?s role as the world?s reserve currency and stated that the United States ?retains exceptional credit strengths, such as the size, resilience, and dynamism of its economy.?
Stock Market ReactionThe announcement triggered a negative market reaction, reflected in falling prices during Monday morning?s opening session. E-mini S&P 500 futures (US SPX 500 mini on FXOpen) retreated, as indicated by the arrow on the chart, pulling back from the highs reached by Friday?s close.
Last week, we pointed out signs of slowing momentum in the S&P 500 rally. Could the decline continue further?
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