US credit rating downgraded

After a nonstop rally by North American stock markets fueled by the expectation of no recession coming anytime soon and acceptable second-quarter earnings, on Tuesday the US was downgraded by Fitch, one of the top three global credit rating agencies, from AAA to AA+. Equities halted their rally and have been slumping for the past three days. S&P and Nasdaq slid 0.78% and 0.64% respectively and Canada’s S&P/TSX lost 1.30% in the last five trading days.

The US economy no longer has the higher credit rating possible assigned by Fitch and its debt is downgraded by one notch. It does not mean that the US economy has the risk of defaulting on its public debt, but the downgrade will cause the fixed income of the country to depreciate and push the debt and credit rates higher. The higher bond rates also put pressure on the present value of any future cash flow by companies, lowering the current lofty valuation of US companies.
The irony is that the US dollar appreciated following the credit downgrade as the risk-off mode globally pushes capital to more safe haven currency which US dollar, Japanese Yen and Swiss Franc come at the top of the list. The Canadian dollar held pretty strong at 1.34 against USD as oil prices have increased again. West Texas Intermediate (WTI) prices went from lows of $67 per barrel last month to over $80 today, the level last seen in April. Numerous analysts still believe that as the winter gets closer we can see oil prices jumping over $100 per barrel again.