After the market closed on Friday, Moody's downgraded the U.S. debt citing growing deficits. This is the second Black Swan event for investors in 2025, the first one being Trump's shock trade war.
This scenario is very similar to the Standard and Poor's debt downgrade that took place in August 2011 during Obama's presidency. A Republican-led Congress was dragging their feet on a budget bill while playing chicken with an impending debt default.
“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.” So much for DOGE.
In the August 2011 debt downgrade stocks crashed -20% straight line and the Fed was forced to support the bond market.
...would this US credit downgrade put paid to the recent US market rally from the April lows?
Supporting this thesis:
1. US ETF tracking market indices is off -1% in post-market trading after the downgrade was announced after Fri close.
Market participants would be keenly watching US futures at the start of Monday morning
2. US market is already in OVERBOUGHT position and complacency has crept in after the US-China trade truce
3. US market is in GREED zone closing in to EXTREME GREED in the CNN market sentiment
4. US 10 yr yield jumped up after the announcement, raising concerns that US risk premium will widen ahead
5. Bad news allowed to brew over the weekend provides enough time for retailers to digest and probably pull the trigger to exit early on Monday; improved but overstretched positive sentiment about to cave in
6. Technical resistance is fairly strong at the 5800-5900 level, and SPX has already breached this slightly or overshot suggesting that this 'event' could entail a fake breakout
Plus
We have the RBA rate decision next Tuesday : no surprises if RBA cuts 25bps as everyone in market expecting it. But if they don't deliver, that would be a dampen market sentiment.
