Equity futures traded cautiously on Wednesday following an announcement by Fitch that they have downgraded US credit to AA+ ‘stable’ from AAA ‘negative’. The downgrade comes at a time when there have been few new changes on the fiscal side in the US, and it is unclear what impact it will have on the markets.
Some analysts believe that the downgrade could spark some profit-taking in equities, as investors become more risk-averse. However, others believe that the downgrade will have little impact on the markets, as the US economy remains strong.
In other news, WTI crude oil hit its highest level in three months, as traders reacted to a massive crude inventory draw reported in last night’s API data.
The DXY and US bond markets have also been largely unscathed after the credit downgrade.
In FX, the JPY is leading the major currencies to the upside, as risk sentiment sours following Fitch’s downgrade.
The NZD is the weakest of the majors, following a mixed Q2 Jobs report. For the remainder of the day, the main focus will be on the incoming data from the US, with the ADP national employment data. If the data is strong, it could weigh on the EURUSD and GBPUSD.
We believe that the US economy remains strong, and that the downgrade from Fitch will have little impact on the markets. However, we will be watching the ADP data closely, as it could provide some clues about the direction of the EURUSD and GBPUSD.
If the ADP data is strong, we recommend looking for additional downside in the EURUSD and GBPUSD. However, if the data is weak, we recommend staying out of the market.
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