U.S. stock markets started August on a downward trend following a strong July, with the Nasdaq Composite bearing the most losses due to rising Treasury yields and a surprise downgrade of the U.S. government’s credit rating. Major companies such as Amazon and Apple reported their earnings, with Amazon surpassing expectations due to a strong core retail performance and causing its stock to rise by over 9%. Apple experienced a 3% decline after a mixed report that included disappointing iPhone sales but a robust services sector.
Significantly, Fitch Ratings downgraded the U.S. government’s credit rating from AAA to AA+, citing “governance and medium-term fiscal challenges”. This marked the first negative surprise for the markets in a while, prompting some investors to reduce riskier positions.
The Labor Department’s nonfarm payroll report revealed a slowing down in job additions from the rapid pace at the start of the year. It reported an addition of 187,000 jobs in July, on par with June’s revised 185,000. However, the unemployment rate dropped slightly to 3.5% from 3.6% the previous month, while wage growth remained steady at 4.4%.
The yield on the benchmark 10-year U.S. Treasury note saw a rise from 3.95% to nearly 4.20% before dipping to about 4.05% following the jobs report. The tax-exempt municipal bond market weakened with the Treasury sell-off, and the investment-grade corporate bond sector experienced oversubscription throughout the week. Fitch’s downgrade of U.S. debt led to lower trading in the high yield corporate bond market and fostered risk-off sentiment. Investors became more selective, showing lukewarm demand for some issues while higher-quality deals continued to perform well.
