The futures market is trading well in the red this morning, following a downgrade of U.S. Treasury Bonds from ratings agency Fitch after the market close yesterday. Fitch reduced its rating from AAA to AA+, noting that it “expected fiscal deterioration over the next three years” and stated that “the repeated debt limit standoffs and last-minute resolutions have eroded confidence in fiscal management.” This downgrade appears to have hurt traders’ sentiment, causing them to sell some of their stock holdings. Payroll-company ADP also noted that private sector job gains reached 324,000 in July, largely beating expectations. This outperformance was driven by hiring in the services sector and suggests the U.S. economy is faring better than expected. Even so, stock prices were unmoved by the report, suggesting that trading will be weak today.
The stock market recorded a lackluster trading day yesterday. The indices fell early in the trading session, but moved sideways after the Institute for Supply Management released its manufacturing index. This report showed a stabilization of the manufacturing sector in July, which stepped up marginally from the lows in June, as businesses have benefited from new orders. Overall, the markets finished the day in the red, with the S&P 500 declining 12 points (down 0.27%) and the NASDAQ off by 62 points (down 0.43%). On the other hand, the Dow Jones Industrial Average finished the day 71 points higher (up 0.20%), bolstered by a strong outperformance from Dow component Caterpillar (CAT), which reported better-than-expected quarterly results. Market breadth was rather weak, as decliners outpaced advancers by a 1.9-to-1.0 ratio. Most of the 11 economic sectors ended the day in the red, with utility stocks among the worst performers. On the other hand, industrials were among the best performers, buoyed by improving sentiment following Caterpillar’s results.
In commodity news, oil prices rose yesterday as volumes produced fell to relative lows ahead of the Organization of Petroleum Exporting Countries (OPEC) meeting later this week. Traders believe that no change in production policy will occur at the meeting, continuing an undersupplied condition. U.S. Treasury bond yields were mixed yesterday before the Fitch announcement after hours, with short-term rates rising and long-term ones falling. The yield curve remains sharply inverted, with several short-term yields well above those with longer durations, which usually portends a coming recession. The Chicago Board Options Exchange Volatility Index, or VIX, also known as the fear index, rose yesterday, rising from relative lows reached in the past month. Still, the index remains quite low, suggesting traders are not willing to pay much for downside risk protection.
Several economic reports will be released in the days ahead. These include initial jobless claims, the Institute for Supply Management’s Services Index for July, and Standard & Poor’s Final U.S. Services Purchasing Manager’s Index for July. On Friday, U.S. nonfarm payrolls and the unemployment rate for July are on the docket. Additionally, several hundred companies across a wide array of industries will report quarterly results in the weeks ahead. Notably, Dow-30 companies Apple (AAPL) and Amgen (AMGN) will report after the bell tomorrow. Overall, we think most eyes will be on earning results and company outlooks in the days ahead. - John E. Seibert III
At the time of this article’s writing, the author did not hold any positions in the companies mentioned.
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