Dow dropped 345, decliners over advancers about 4-1 & NAZ retreated 314. The MLP index was off 2+ to the 237s & the REIT index fell 1+ to the 377s. Junk bond funds continued to be sold & Treasuries had modest selling which raised yields. Oil was off 1+ to the 79s & gold slid back 5 to 1973 (more on both below).
AMJ (Alerian MLP Index tracking fund)
![Live 24 hours gold chart [Kitco Inc.]](https://www.kitco.com/images/live/gold.gif?0.2180338269244485)
Fitch announced it has officially downgraded the US'
long-term foreign-currency issuer default rating to "AA+" from "AAA,"
saying the downgrade "reflects the expected fiscal deterioration" &
the nation's heavy debt burden. The ratings agency pointed the America's "erosion of governance,"
rising deficits, & tightening by the Federal Reserve. It also said its
expects the US economy to slip into a mild recession in Q4. Treasury Secretary Janet Yellen issued a statement
pushing back on Fitch's move, saying the rating agency was using old
data & arguing conditions have improved under the Biden
administration. "I strongly disagree with Fitch Ratings’ decision," Yellen's
statement said. "The change by Fitch Ratings announced today is
arbitrary and based on outdated data." "Fitch’s quantitative
ratings model declined markedly between 2018 and 2020 – and yet Fitch is
announcing its change now, despite the progress that we see in many of
the indicators that Fitch relies on for its decision," she continued. "Many of these measures, including those related to governance, have
shown improvement over the course of this Administration, with the
passage of bipartisan legislation to address the debt limit, invest in
infrastructure, and make other investments in America’s
competitiveness." Investors use credit ratings to assess the risk
profile of companies & govs when they raise financing in the
debt capital markets. Generally, the lower a borrower's rating, the
higher its financing costs. The agency also said it expects the US federal deficit to grow from 3.7% of GDP in 2022, to 6.3% of GDP in 2023.
Fitch downgrades top-tier US credit rating citing 'fiscal deterioration'
It’s not a growing jobs market, strong $ or a resilient economy that will help the US regain the top rating from Fitch. According to the firm, it's going to take a major step up in governance. Fitch Ratings cut the US' long-term foreign currency issuer default rating to AA+ from AAA, sending global stock markets down today. The agency had placed the country's rating on negative watch in May, citing the debt ceiling issue. “This is a steady deterioration we’ve seen in the key metrics for the United States for a number of years. In 2007, general government debt was less than 60% and now it’s 113%, so there has been a clear deterioration,” Richard Francis, Fitch's co-head of the Americas sovereign ratings, said. “Furthermore, we’re expecting fiscal deficits to rise over the next three years and we expect debt to continue to rise over the next three years.” Francis added that, in addition to the Jan 6, 2021 insurrection, the rating agency has noted a “constant brinkmanship” surrounding the debt ceiling among both Reps & Dems. That has hindered the US gov from coming up with meaningful solutions to deal with growing fiscal issues, particularly around entitlement programs such as Social Security & Medicare, he noted. To regain the top rating, Francis said the rating agency would watch for a long-term fiscal solution that addresses entitlement programs & for a willingness to look at the revenue, as well as the spending side, of such programs. He also said Fitch would look for a reduction of the deficit & for the gov to tackle the debt ceiling issue by suspending or getting rid of it. “Given the high level of the debt, given the increasing deficits that we’re expecting, and given the kind of deterioration in governance and unwillingness to really tackle these issues, we don’t think that’s consistent with the AAA anymore,” Francis continued. Many reactions, from high-profile economists to the White House, have been critical or dismissive of the downgrade given the resilience of the nation's economy. In response to pushback, Francis said that although the economy is very important & could have an impact on the overall fiscal picture of the US, it will not be enough to tackle the governance issues. “This idea that the economy somehow, we skirt a recession and there should not be a downgrade, that’s just not really what we’re looking at,” he said. “We’re looking at a more fundamental picture of the United States, creditworthiness and also kind of what we expect to happen over the next few years.”
The Fitch analyst behind the U.S. downgrade breaks down the decision
Intl buyers are pulling back from the US housing market, as high mortgage rates, soaring home prices, a meager supply of homes for sale & a strong $ all make the purchases much less financially attractive. From Apr of last year to this Mar, intl buyers bought roughly 85K homes; that's the lowest number since the National Association of Realtors (NAR) began tracking such purchases in 2009 & a 14% drop from the year before. While overseas buyers bought fewer homes, they paid more for them. The median price of homes they purchased was $396K, the highest the Realtors ever recorded. China, Mexico, Canada, India & Colombia were the top 5 countries of origin for intl buyers of existing homes by number of houses, not $ volume. The survey does not count new construction, where intl buyers are also active. Chinese buyers had the highest average purchase price, at $1.23M, likely because a 3rd of them bought in California, where home prices are highest. In total, 15% of foreign buyers bought homes worth more than $1M. “Home purchases from Chinese buyers increased after China relaxed the world’s strictest pandemic lockdown policy, while buyers from India were helped by the country’s strong GDP growth,” said Lawrence Yun, NAR's chief economist. “A stronger Mexican peso against the U.S. dollar likely contributed to the rise in sales from Mexican buyers.” While foreign sales dropped overall, Chinese purchases did make sizable gains. The total of 2023 Chinese home purchases is the highest since 2018, which was one of the peak years for Chinese intl property purchasing, according to Juwai IQI, an Asia-based intl real estate technology group. “Only about one in every 10 Chinese buyers is purchasing purely as an investment, which is a big change from the mid-2010s, when wealthy Chinese consumers looked to diversify their wealth out of China,” said Kashif Ansari, Juwai IQI co-founder & group CEO. “In 2023, the typical Chinese buyer is no longer an offshore investor but is on their way towards becoming an American resident and citizen.” Foreign buyers continue to flock to the same places as they have in the past, namely Florida (23%), California (12%), Texas (12%), North Carolina (4%), Arizona (4%) & Illinois (4%). Chinese buyers in particular like California, as they often buy so that their children can attend local schools & universities. About 42% of foreign buyers used cash. As for why they are buying, ½ purchased the properties for use as a vacation home, rental property or both, up from 44% the previous year. The drop in overall foreign purchases is unlikely to ease the competition for domestic buyers, as intl buyers only made up a little more than 2% of all buyers. But it could help on the margins in certain local markets favored most by foreign buyers.
Foreign buyers are bailing on the U.S. housing market
Gold edged higher, helped by some safe-haven bids after Fitch downgraded the US top credit rating, although an uptick in $ capped bullion's gains. Spot gold was last up 0.4% at $1951 per ounce, while US gold futures rose 0.5% to $1988. Ratings agency Fitch downgraded the US gov to AA+ from AAA, to reflect expected fiscal deterioration over the next 3 years & repeated down-the-wire debt ceiling negotiations. Helping zero-interest-bearing gold, yields on benchmark 10-year bonds slipped after the downgrade, while futures also tumbled on a flight to safety in global financial markets.
Gold Firms As Bond Yields Slip After Fitch US Downgrade
Signs of a quickly tightening oil market are pushing crude prices toward 16-week-highs, with the US benchmark WTI recently up 0.6% at $81.89 a barrel & the global benchmark Brent 0.5% higher at $85.37. Data late yesterday from trade group API showed US crude-oil inventories dropped last week by a massive 15M barrels, while gasoline & diesel stockpiles also fell. Those bullish numbers will be quickly forgotten, however, if the official data from the EIA doesn't also show a large decline in crude supplies.
Oil Prices Climb Toward 16-Week-High as US Inventories Drop
The markets are getting the pause period that is needed. Questions regarding the effects of the credit downgrade will plague the stock market for some time after Fitch cited fiscal & political instability.
Dow Jones Industrials
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