Rating agency Fitch downgraded the top credit rating of the US government on Tuesday. Equity markets reacted mostly negatively to the news while gold edged up and the US Dollar Index fell.
Fitch cuts the US government’s rating to AA+ from AAA, its highest rating, due to concerns about the fiscal deficit in the coming years as well as further debt ceiling negotiations in the future. Fitch had already made the possibility of a downgrade public in May and said it would finish its review in the third quarter of the year. Fitch is now the second of the three major rating agencies to deny the US the best rating after Standard & Poor’s.
The downgrade’s effect on markets was blurred due to a series of economic data from the US on Tuesday. The US Labor Departments JOLTS report released Tuesday showed a total of 9.58 million jobs were open in the US economy during the month of June. That was down from 9.62 million openings in May. Both values are the lowest levels since early 2021. The US Manufacturing Purchasing Managers’ Index came in at 46.4, still below the level of 50, which indicates contraction. Following the Fitch downgrade and economic data, gold was trading about 0.3% higher early Wednesday, while the US Dollar Index and 10-year Treasury yields were down.
In New York, the major stock indices were mixed. The Dow Jones Industrial gained 0.2% to finish Tuesday’s session at 35,630.68 points while the S&P 500 lost 0.27%, ending at 4576.73 points. The Nasdaq-100 fell 0.25%, closing at 15,718.01 points.
In Asia, stock markets were trading clearly lower on Wednesday. Japan’s Nikkei 225 lost 2.4%. Hong Kong's Hang Seng Index was down 2.1% and the Shanghai Composite lost 0.9%. In South Korea, the Kospi dropped 1.9%.
Macroeconomic data out of Europe released at the start of the week painted the picture of a fragile eurozone economy. The eurozone economy grew by a meagre 0.3% during the second quarter when compared with the previous quarter. Inflation decelerated to 5.3% but was still much higher than the European Central Bank’s (ECB) target of 2%. Core inflation – which strips out volatile energy and food prices – remained unchanged at 5.5%. Last week, the ECB hiked interest rates for the ninth time in a row, brining its benchmark interest rate to 3.75% in an effort to fight inflation.
Corporate news in focus: Quarterly figures from Fresenius, Fresenius Medical Care, Kraft Heinz, Qualcomm, PayPal.
Economic data in focus: SECO Swiss consumer sentiment (09:00 CET), procure.ch Swiss Purchasing Managers’ Index (09:30), US ADP National Employment Report (14:15), weekly US EIA Petroleum Status Report (16:30).
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.
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Reference regarding valuation rates
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Explanation of investment recommendations for stocks
We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).
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Explanation of investment recommendations for bonds
We employ both qualitative and quantitative methods to derive our recommendations, which are to be seen as relative to sector/quality peers among comparable maturities. “Buy” and “Sell” recommendations demand a qualitative in-house analyst opinion, in which we incorporate both historical and projected financial results and credit metrics as well as past and anticipated company and sector-specific observations and trends. We recommend “Buy” for a security for which we expect a strong relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Sell” if we expect strong relative underperformance compared to sector/quality peers among comparable maturities. The ratings “Attractive”, “Hold” and “Unattractive” can be based purely on a quantitative approach, which includes the market price of credit risk, valuation of equities and associated instruments, corporate leverage, liability structure, size, and agency rating. We recommend “Attractive” for a security for which we expect a relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Hold” if we expect an average performance compared to sector/quality peers among comparable maturities. We recommend “Unattractive” if we expect a relative underperformance compared to sector/quality peers among comparable maturities.
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Definition of rating categories of S&P and Moody’s which are relevant for us:
AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates
For more information on our methodology for bonds, please contact your LGT relationship manager or your local LGT Group company.
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