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NFPs: 'Never mind Fitch, watch US jobs!'


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Fitch’s US rating downgrade highlights concerns surrounding US debt, but is this enough to press the ‘risk off’ button?

 

 Angeline Ong | Financial Analyst, Presenter and Content Editor, London | Publication date: Thursday 03 August 2023 14:47

IG financial analyst @AngelineOng caught up with Shard Capital’s @Bill_Blain to find out why he thinks the US jobs report is the bigger risk event.

(Video Transcript)

Eye on global assets

Hello, I'm Angeline Ong, and welcome to IG's Trading the Markets. Here to discuss the outlook for global assets, now that investors have had a bit of time to digest the fit downgrading the US's credit rating is Bill Blain, strategist and head of alternative assets at Shard Capital.

AO: Bill, there seem to be two camps out there. Some brokerages say the downgrade is unlikely to result in a sustained drag on US financial markets. And then there's another camp, there's CEO Jamie Dimon, JP Morgan, of course, calling Fitch the move ridiculous, and Janet Yellen saying it's based on outdated data. Which camp are you in?

BS: Well, I'm on the side that says Fitch are absolutely right to be raising the risks of increased political conflict in the US. They call it governance in the full statement. Now, some of the points they make about the US budget deficit and the sustainability are all fair points, but, you know, I don't think that we face, in normal circumstances, a risk of the US defaulting.

It's simply not going to happen. They can press the printing press button and print more money to get into that situation. Now, that has consequences for the currency yield. But the key thing that this report highlights is rising political risk.

And it's interesting that it came the same day that former President Trump was indicted on effectively treason charges against the US. Now, that risk of increased polarisation and increased conflict in terms of the debt ceiling and all the negotiations that go around that, that's what we're really looking at in terms of what the risks identified here are.

Fitch shakes things up

AO: Bill, I've been watching the reaction to Fitch, and at first there was a bit of a judder, as you rightly pointed out, but then it started stabilising across different asset classes. There were some Asian stocks and markets that still registered losses earlier today, but it seems to have come into a more even keel. What do you think this means for investors who were slightly concerned and thinking, perhaps I should change my allocation, or should they stand pat and watch out for perhaps another set of figures that might give us better direction?

BS: You know, we've got some really interesting other numbers coming up. And, you know, later today, some of the big tech companies will be reporting earnings. If they come in weaker than expected, that's going to fuel the sentiment that's developing that tech earnings are getting overstated in terms of their valuations.

We've also got an absolutely critical number on Friday, which is the US employment report. And the suspicion there is that the resilience or the apparent resilience of the US economy and the fact that it seems to be heading towards that holy grail of a soft landing, that's actually a lagging effect in terms of the 13 interest rate hikes that the Federal Reserve (Fed) has made.

People now think the US economy may not be as strong as we thought it was, as resilient as we thought it was. And if that happens, that's going to really impact expectations in the stock markets. So, every day, you have some earnings or some economic numbers. It's just when you have Apple reporting and then you have the big monthly employment data, they really have the capability to shake markets.

So, on top of yesterday's shock and surprise from the downgrade, which does have implications for big investors and then maybe a little bit of a dent in the over-rosy expectations for tech stocks, and then the resilience of the economy being damaged, together they amount to quite a substantial shock for investors.

And we could see something of correction in the equity markets as a result. Of course, if they come in stronger than expected, then everyone will rejoice, and they'll start spending more money again and buying stocks and everything will go stratospheric again.

The market as a ' voting machine'

AO: Speaking of a correction or a reset, some think that perhaps there might be a buying window later this year, maybe even this quarter. What are your thoughts on that and what would you look out for before making this decision?

BS: I certainly have thought about this: we're not going to have a kind of major devastating crash of the kind that we saw in the 1920s. No, I'm not old enough to remember it personally, but I do remember very well what happened in 2007 and 2008.

I don't think we're heading for that kind of thing, but I think we're going to see certainly the current market uncertainties and instabilities mean that some kind of reset, some kind of rationalisation of expectations is more likely to occur than not, because there are so many things that investors are beginning to fear.

Now, one of the things you've got to remember is that markets are not clever. They are not omnipotent. All that the market is, is a voting machine, and it sums up what everybody thinks collectively and has waited for the amount that they spend to back that thinking.

And that really depends on sentiment, and we've got a lot of sentiment issues coming up just now. We've got things like rising consumer debt, which is on top of the inflation effects, biting into discretionary spending, things like cars, for example. We've also got corporates under trouble because they can't refinance themselves. Credit conditions are tightening. We've got concerns about the banking sector in terms of how much they hold of underwater debt. You've also got things like, as I've talked about earlier, politics is going to be, you know, we're running into an election cycle in the US and the UK, which are both going to be extremely polarising.

If you take all these things together and a host of other things, like just how overvalued the tech sector looks because of this AI bubble, and all these things point to some kind of correction. That's my expectation. Other people think that markets are going to go higher and that we will see inflation drop completely, and that should boost the chances of interest rates being cut, which would obviously be very positive.

AO: We have to leave it there. Interesting stuff. Bill Blaine there, sharing his thoughts on the Fitch downgrade and where financial assets will go for the rest of this year. Bill Blaine, strategist and head of alternative assets at Star Capital.

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