Breaking down the Fitch U.S. credit downgrade

Thursday, August 3–Jim Wyckoff’s morning markets report

Asian and European stock markets were mostly lower in overnight trading. U.S. stock indexes are pointed to slightly lower openings when the New York day session begins. The marketplace has mostly digested the surprise downgrade of the U.S. government’s credit rating by Fitch. It appears the downgrade has cast a bit of a pall over what was a generally upbeat summertime marketplace. The Fitch downgrade came amid no major changes in U.S. government policies or actions recently, but instead appears to be a recognition by Fitch of the bitter partisanship among lawmakers, including over raising the U.S. debt ceiling, in recent years. Some would argue the Fitch news was just an excuse for the U.S. stock indexes to see downside corrections after recent good gains. As for rising bond yields this week, the Treasury yields have actually been trending higher (prices lower) since March. JP Morgan chief Jamie Dimon, when asked about the significance of the Fitch credit downgrade to the U.S., replied that it did not mean much and that the true judge of U.S. creditworthiness is the markets. Ironically, the U.S. dollar saw some safe-haven demand Wednesday, in the wake of the Fitch downgrade.

In overnight news, the Bank of England raised its main interest rate by 0.25%, to 5.25%. The move was expected.

Euro zone inflation continued to decline in June, as the producer price index was down 3.4%, year-on-year. That was close to market expectations. The core PPI (excluding food and energy) was up 2.5%, year-on-year.

Traders are awaiting the U.S. data point of the week on Friday: the U.S. employment situation report for July. The key non-farm payrolls number is expected to come in at up 200,000 jobs, compared to a rise of 209,000 in the June report.

The key outside markets today see the U.S. dollar index firmer and at a four-week high. Nymex crude oil prices are near steady and trading around $79.50 a barrel. Meantime, the benchmark 10-year U.S. Treasury note yield is presently fetching 4.138%. 

U.S. economic data due for release Thursday includes the weekly jobless claims report, the Challenger job-cuts report, preliminary productivity and costs, the U.S. services PMI, the ISM report on business services, manufacturers’ shipments and inventories, the global services PMI and the monthly retail chain store sales index.

U.S. STOCK INDEXES

September S&P 500 e-mini futures: Prices are weaker and hit a three-week low in early U.S. trading. Bulls still have the firm overall near-term technical advantage. The shorter-term moving averages (4-, 9- and 18-day) are neutral early today. The 4-day moving average is below the 9-day. The 9-day is above the 18-day moving average. Short-term oscillators (RSI, slow stochastics) are bearish early today. Today, shorter-term technical resistance comes in at 4,575.00 and then at 4,600.00. Support for active traders is seen at 4,500.00 and then at 4,450.00. Wyckoff’s Intra-day Market Rating: 4.5

September Nasdaq index futures: Prices are weaker in early U.S. trading. Bulls still have the firm near-term technical advantage. Shorter-term moving averages (4- 9-and 18-day) are neutral early today. The 4-day moving average is below the 9-day. The 9-day average is even with the 18-day. Short-term oscillators (RSI, slow stochastics) are bearish early today. Shorter-term technical resistance is seen at the overnight high of 15,507.50 and then at 15,650.00. On the downside, shorter-term support is seen at the overnight low of 15,339.50 and then at 15,200.00. Wyckoff’s Intra-Day Market Rating: 4.5.

U.S. TREASURY BONDS AND NOTES FUTURES

September U.S. T-Bonds: Prices are solidly lower and hit a contract low in early U.S. trading. Shorter-term moving averages (4- 9- 18-day) are bearish early today. The 4-day moving average is below the 9-day and 18-day. The 9-day is below the 18-day moving average. Oscillators (RSI, slow stochastics) are bearish early today. Shorter-term technical resistance is seen at the overnight high of 122 8/32 and then at 123 even. Shorter-term support lies at the overnight contract low of 120 22/32 and then at 120 even. Wyckoff’s Intra-Day Market Rating: 3.5

September U.S. T-Notes: Prices are lower and hit a four-week low in early U.S. trading. Shorter-term moving averages (4- 9- 18-day) are bearish early today. The 4-day moving average is below the 9-day and 18-day. The 9-day is below the 18-day moving average. Oscillators (RSI, slow stochastics) are bearish early today. Shorter-term resistance lies at the overnight high of 110.27.0 and then at Wednesday’s high of 111.07.5. Shorter-term technical support is seen at the overnight low of 110.09.5 and then at the contract low of 110.05.0. Sell stops likely reside just below those levels. Wyckoff’s Intra-Day Market Rating: 4.0

EURO CURRENCY

The September Euro currency futures are slightly down in early U.S. trading and hit a four-week low overnight. The shorter-term moving averages for the Euro are bearish early today, as the 4-day is below the 9-day and 18-day. The 9-day is below the 18-day moving average. Short-term oscillators for the Euro are bearish early today. The Euro currency finds shorter-term technical resistance at Wednesday’s high of 1.1043 and then at this week’s high of 1.1072. Shorter-term support is seen at the overnight low of 1.0935 and then at 1.0900. Wyckoff’s Intra Day Market Rating: 4.5

NYMEX CRUDE OIL

September Nymex crude oil prices are near steady in early U.S. trading. The shorter-term moving averages are bullish early today as the 4-day is above the 9-day. The 9-day is above the 18-day moving average. Short-term oscillators (RSI and slow stochastics) are neutral to bearish early today. Look for buy stops to reside just above technical resistance at $80.00 and then at $81.00. Look for sell stops just below technical support at the overnight low of $78.69 and then at  $77.00. Wyckoff’s Intra-Day Market Rating: 5.0

GRAINS

Grain futures prices were firmer in overnight trading, on short covering from this week’s losses. Bulls have faded badly recently. Weather forecasts for the Midwest are not bullish anymore. Cooler temps and better rainfall chances are expected the next several days. There is also talk that Ukraine grain may be able to be successfully shipped to the world through land routes in Europe. Some keener risk aversion late this week may also keep the grain market bulls standing on the sidelines. On tap today is the weekly USDA export sales report.

IMPORTANT NOTE: I am not a futures broker and do not manage any trading accounts other than my own personal account. It is my goal to point out to you potential trading opportunities. However, it is up to you to: (1) decide when and if you want to initiate any traders and (2) determine the size of any trades you may initiate. Any trades I discuss are hypothetical in nature.

Here is what the Commodity Futures Trading Commission

(CFTC) has said about futures trading (and I agree 100%):

1. Trading commodity futures and options is not for everyone. IT IS A VOLATILE, COMPLEX AND RISKY BUSINESS. Before you invest any money in futures or options contracts, you should consider your financial experience, goals and financial resources, and know how much you can afford to lose above and beyond your initial payment to a broker. You should understand commodity futures and options contracts and your obligations in entering into those contracts. You should understand your exposure to risk and other aspects of trading by thoroughly reviewing the risk disclosure documents your broker is required to give you.

Jim Wyckoff