Fitch Downgrade, Earnings

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Fitch Downgrade, Earnings

Stock futures are falling after a Fitch downgrade of the US credit rating…

Aug 02, 2023

Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets in the day ahead. Today is Wednesday, Aug. 2.

State of Play

Fitch downgraded the US credit rating after yesterday’s close, which appears to have doused cold water on some of the risk appetite that has characterized markets in recent months. As of 0620 we are looking at some risk-off developing:

Stock index futures are pointing to losses, led by the Russell 2000 which tracks small caps (-1.2%). The Nasdaq is down 1% even after positive earnings from AMD (AMD 0.00%↑) after yesterday’s close. S&P 500 futures are off by 0.7%;
Paradoxically, the downgrade has led to buying of US government bonds. The yield on the 2-year is down 5 basis points this morning, to 4.86% whilst the 10-year is down 2bps to 4.03% (yields move inversely to prices);
Commodities are mixed. Would expect gold to bounce on this, but it’s only up 0.4%. WTI crude oil is up 0.6% to trade around $82/barrel. Copper is down 0.8%;
Cryptos are recovering some ground after a fresh bout of selling. Bitcoin is up almost 2% this morning to trade around $29,500.

Known Events

Another massive day of earnings awaits. CVS (CVS 0.00%↑) is up first, expected for 0630. We’re also due to hear from Kraft Heinz (KHC 0.00%↑), Ferrari (RACE 0.00%↑), Yum! Brands (YUM 0.00%↑), DuPont (DD 0.00%↑), Wingstop (WING 0.00%↑), and Scotts Miracle-Gro (SMG 0.00%↑), among others, all before the open at 0930.

After the close at 1600, PayPal (PYPL 0.00%↑), Shopify (SHOP 0.00%↑), Qualcomm (QCOM 0.00%↑), Etsy (ETSY 0.00%↑), MGM Resorts (MGM 0.00%↑), TripAdvisor (TRIP 0.00%↑), and DoorDash (DASH 0.00%↑) report earnings.

The Bottom Line©️

The US credit rating has been downgraded before, about a decade ago, and nothing happened. Would expect history to repeat here. Yes, the US is running crazy fiscal deficits but as long as foreign investors keep buying US bonds everything can continue on its merry way. So would not expect this to be the catalyst for a major unwind in risk appetite. We’re still due for one, just don’t see this to be quite important enough.

Earnings have been a bit of a mixed bag. It’s worth keeping an eye on travel stocks, which have been sold off recently, especially airlines. The JETS ETF (JETS 0.00%↑) is down more than 2% over the last month. Yesterday JetBlue (JBLU 0.00%↑) lowered guidance “to reflect near-term headwinds.” and airlines as a whole were punished. Today in addition to the two travel companies that report after the close (see above. MGM and TripAdvisor) we also have Allegiant Travel Co (ALGT 0.00%↑) before the open. Tomorrow we’ll get Expedia (EXPE 0.00%↑) and AirBnB (ABNB 0.00%↑). Major airlines have reported already this quarter.

Could the Fitch downgrade be a buying opportunity? Sure, if you believe the ‘soft landing’ narrative. But that probably needs continued consumer strength to come off, and if Americans start traveling less then it probably means they will be spending less on other discretionary items as well. That isn’t good for the global economy.

Housekeeping

Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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