A more cautious mood after Fitch cuts US credit rating

<p>Equities are certainly reserving caution so far today and there is a slight bid in bonds as well. In FX, the reaction is rather muted though but perhaps it may take some time for traders and markets to digest what is happening.</p><p>In any case, I want to say that the context of the credit rating cut by Fitch also matters. And this isn't a similar story to what we saw when S&amp;P downgraded the US credit rating back in 2011. I would say this time around a downgrade isn't one that is out of the blue, considering the debt limit standoffs that we have seen occurring ever so frequently.</p><p>And in that sense, the fact that this latest news isn't that shocking may see markets take to it with a calmer head.</p><p>The only gripe perhaps is that some fund houses may have to find a workaround on their portfolio diversification. Typically, they have to hold certain amounts of AAA bonds and now they may have to hide behind semantics or do some adjustments on that.</p><p>Adam posted a good recount on the events back in 2011 when the US last got downgraded <a href="https://www.forexlive.com/news/here-is-what-happened-in-markets-the-last-time-the-us-was-downgraded-stocks-fx-and-gold-20230801/" target="_blank" rel="follow">here</a>. It triggered a chain reaction of risk-off events but keep in mind that at the time, Europe was also not doing well so the panicky reaction may be a bit overstated at the time.</p><p>If anything else, I would expect markets to take in the latest Fitch credit rating cut in stride. We're coming off a strong rally in equities so far this year and even if this were to put a dent in that, it would end up being a good dip-buying opportunity. Naturally, you can expect some fear just off the headlines alone but compared to 12 years ago, this is a market that can quickly cast aside any worries within a day.</p><p>I also don't expect this to rock the dollar's standing among major currencies, so long as the US economy continues to outshine the rest – which isn't hard as everyone else is doing much worse. So, yes there might be some kneejerk flows to the news but all in all, this question <a href="https://www.forexlive.com/news/which-comes-first-low-inflation-or-the-economy-breaking-20230711/" target="_blank" rel="follow">here</a> is still the key macro driver in markets at the moment.</p>

This article was written by Justin Low at www.forexlive.com.