This week investors unexpectedly attend a thriller with a long timeline after Fitch downgraded U.S. sovereign rating one notch down from the triple-A top. This decision hammered markets with debt market to react first, and stock market to follow.
The S&P 500 broad market index spiraled by 2.0% to 4490 points, but rolled back later. This drop could be deeper, but expectation of the U.S. labour market report for July cooled investors’ eagerness. This roll back deliver a reliable short signal for the S&P 500 index from 4510-4530 points. The last downgrade case was recorded in August 2011, when Standard & Poor’s rating agency lowered U.S. sovereign rating one notch that resulted in S&P 500 index drop by 17-19%.
This time the Non-Farm Payrolls may surprise markets too, as it was with the report for June, when official figures were much lower than expected. Statistical modeling suggest strong Non-Farm Payrolls at 300,000-310,000 vs consensus estimates of 200,000. However, a sharp slowdown in business activity in the United States demonstrates a slowdown in economy.
The U.S. Dollar is seen much overbought as it hit strong resistance levels. The previous case of a sovereign rating downgrade in August 2011 demonstrated high volatility for the Greenback. But the American currency was almost unchanged against the basket of six major currencies by the end of August that year. If the story would repeat itself than the U.S. labour market report should weaken the Dollar. So, we may expect another surprise report this time.
Apart from this, the thriller is to be continued. U.S. July inflation data that would be released next week would be of great interest. U.S. debt market should be monitored carefully. If the yield curve inversion continues to disappear, the correction of the S&P 500 index could be extended further down.
Technically, the S&P 500 index continues to have an upside formation with targets at 4250-4350 points, that have already been met. The benchmark dive below the support at 4560-4580 points, and is heading towards 4440-4460. The downside signal has been finally shaped with a short trade initiated at 4520 points.
Brent crude prices hit the resistance at $86.00-88.00 per barrel, and are trying to form a correction pattern. The support is located at $76-78 per barrel. Prices may slip below $76 per barrel initiating a recession scenario with targets at $67-69 per barrel of Brent crude.
Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But, the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed. The nearest support is set at $1900-1920 per ounce. However, the similar scenario of August 2011 signals that this support will be very hard to breakthrough.
The Greenback is strengthening, still looking solid compared to its major peers. A sharp correction of the American currency could be expected in August. If such a correction would emerge, good buy opportunities for the Dollar should appear.