US ratings downgrades start with Chinese agency Dagong

• US ratings downgrades start with Chinese agency Dagong;
• Traders buy the rumour and sell the news;
• Goldman Sachs, Verizon and Google report earnings;
• Jobless claims to remain elevated for a couple more weeks.

US futures are pointing to a lower open on Thursday, while the US dollar is coming under pressure, as rumours circulate that the US may be on the verge of another downgrade.

Chinese ratings agency Dagong beat the others to the punch over night, downgrading the US from A to A-, citing the political infighting over the debt ceiling and the lack of a long term solution as the reason for the downgrade. The downgrade doesn’t necessarily come as too much of a surprise, given that we already had a warning from Fitch earlier this week that the US had been put on negative watch. 

That said, if rumours in the markets this morning are anything to go by, it may not be the last downgrade the US receives. That’s one reason why we’re seeing US futures trade in negative territory this morning and the US dollar under pressure against the other major currencies. 

The other reason is simply a case of investors buying the rumour and selling the news. Despite all of the political brinkmanship and infighting, investors remained convinced up until the final day that a deal would eventually be done. On top of that, rumours circulated throughout yesterday that a deal would be done on Wednesday, a day before the deadline. The result of this was that it was almost entirely priced into the markets, prompting investors to lock in gains today and wait for another opportunity to jump back in. 

Once the uncertainty surrounding a US downgrade passes, some form of normality can return to the markets and investors can focus on what they should be concerned with, earnings and economic data. Although, the Fed is going to continue to play its part for a little while yet, with the recent government shutdown likely to delay tapering until December at the earliest. 

Investors are now free to pay more attention to the US and European earnings seasons, with some big companies having already reported and plenty more still to come. In the US, we’ll get earnings from Goldman Sachs, Verizon and Google, among others today, while in Europe BSkyB are scheduled to report. 

We should get a flurry of economic releases from the US over the next week or so, as the backlog of data that was not collected due to the shutdown, is compiled and released. That includes important figures such as the non-farm payrolls, unemployment rate and retail sales, all of which are expected to be released next week. Today though, the focus will be on US jobless claims, which are expected to fall to 335,000. This figure should take into account any remaining backlog in California following the IT issue as well as any spike relating to the government shutdown. Even if we do see another spike today, it’s not a cause for concern as it’s only likely to be temporary. I expect the figures to settle back down in the coming weeks to near 300,000. 


Ahead of the open we expect to see the S&P down 4 points, the Dow down 83 points and the NASDAQ down 9 points.