The ASX is likely to fall today. ASX 200 futures are trading 58 points lower, down -0.80% as of 8:20 am AEST.
The fall follows yesterday’s drop of 1.3%, or 96 points to 7,354.7 at the closing bell, after the downgrading of the US sovereign rating added to market nerves. Fitch downgraded the US credit rating from AAA to AA+, citing expected fiscal deterioration over the next three years as well as growing government debt.
All Aussie sectors were in the red with utilities and real estate as the worst performers.
Utilities was dragged down by AGL Energy (ASX:AGL) (ASX:AGK)’s 4.8% fall, brought on after Macquarie downgraded the stock to a “neutral” rating from “outperform”. Origin Energy was another in the sector that lost big, down 1.2%.
Iron ore producers also tracked lower, with Fortescue (ASX:FMG) Metals Ltd dropping 2%, BHP (ASX:BHP) Group losing 1.1% and Rio Tinto (ASX:RIO) losing 0.9%.
In the US overnight, the S&P 500 logged its first decline of 1% after more than two months.
Speaking about the downgrade, IG Markets analyst Tony Sycamore said, “As expected, the Fitch downgrade unleashed a wave of risk aversion selling, particularly across equities and riskier currencies.
“While the downgrade wasn’t a surprise and, in actual terms, means little to the holders of US treasuries given a lack of suitable alternatives, against the backdrop of weak China PMI and ISM data the day before and equity markets at elevated levels, it has proved to be the catalyst for position unwind.
"The question now is how far the unwind runs before positioning is cleaner and cool heads prevail. We are mindful that equity markets have entered a weaker period seasonally between August and September.”
What the markets did
Here’s what we saw (source Commsec):
US markets dropped on Wednesday after strong US jobs data and as the US Treasury said it will ramp up its debt issuance just a day after the US was downgraded by Fitch Ratings.
Rate-sensitive megacap stocks, including Tesla (NASDAQ:TSLA) (-2.7%), Nvidia (-4.8%), Meta Platforms (-2.6%) and Apple (NASDAQ:AAPL) (-1.6%) all tumbled as the yield on the US 10-year Treasury yield rose to its highest in nearly nine months. Shares of Advanced Micro Devices (NASDAQ:AMD) shed 7%, despite better-than-expected results.
The Dow Jones index fell by 348 points or 1%. The S&P 500 index slid 1.4%, notching its worst day since April. And the Nasdaq index shed 310 points or 2.2%, posting its worst day since February.
European markets
Also fell yesterday as global risk sentiment was pulled down by a US credit rating downgrade. Mining stocks fell by the most, down by 2.7%. Among single stocks, Telefonica (BME:TEF) Deutschland plunged 17.9% to its lowest since March 2020, with traders linking the move to rival Vodafone (LON:VOD) announcing a roaming deal with 1&1 in Germany.
The continent-wide FTSEurofirst 300 index fell by 1.3%. And in London, the UK FTSE 100 index slid 1.4%.
Currencies were weaker against the US dollar in European and US trade.
- The Euro fell from US$1.0994 to US$1.0917 and was near US$1.0935 at the US close.
- The Aussie dollar slipped from US65.92 cents to US65.27 cents and was near US65.40 cents at the US close.
- The Japanese yen dipped from 142.24 yen per US dollar to JPY143.45 and was near JPY143.40 at the US close.
Global oil prices slid 2% despite a historic drop in US crude stocks, as traders de-risk following the downgrade of the US government's top credit by a major ratings agency.
US crude stocks fell last week by 17 million barrels (survey: -1.4 million), the largest drop in US crude inventories according to records dating back to 1982.
- The Brent crude price fell by US$1.71 or 2% to US$83.20 a barrel.
- The US Nymex crude price shed US$1.88 or 2.3% to US$79.49 a barrel.
- The copper futures price slid by 1.7% and the aluminium futures price fell by 2.2%.
- The gold futures price fell by US$3.80 or 0.2% to US$1,975 an ounce.
- Spot gold was trading near US$1,935 an ounce at the US close.
- Iron ore futures shed US91 cents or 0.8% to US$107.41 a tonne.
Oxford Economics' Sean Langcake is betting against a technical recession.
“We remain bullish on Australia’s chances of navigating the next year without entering a technical recession (consecutive quarters of negative growth).
“Although there is a material slowdown underway, Q1 was beset by some temporary drags from net exports, while strong population growth and a tight labour market are important bulwarks against recession. Nevertheless, momentum will be patchy over the next two years, and a contraction in GDP per capita is already underway.”
Langcake also points to a rise in unemployment figures over the coming months as a hedge against recession.
“We have quantified the probability that the unemployment rate will increase sharply in the next year. Our analysis is informed by a range of high-frequency indicators that typically do a good job of predicting slowdowns.
“We find that financial market and business survey measures are still sanguine on Australia’s chances of navigating to a soft landing over the next year. But when we factor in the very tight position of the labour market, there is a far greater chance that unemployment will increase from here.”
What about small caps?
The small cap market also fell yesterday, with the S&P ASX Small Ordinaries losing 1.36% to 2,869.90.
A few small caps have kicked off today’s news cycle and you can read more about these developments throughout the day.