FX.co ★ US premarket on August 2: US stock market declines sharply

Futures on US stock indices opened with a significant drop following the news of a credit rating downgrade for the US. S&P500 futures fell by 1%, and Nasdaq 100 futures tumbled by 1.3%. Global stock indices also declined due to the Fitch Ratings' downgrade, prompting a swift shift away from riskier assets.

In Europe, the overall losses led to the largest drop in the benchmark regional index in nearly four weeks.

Fitch downgraded the US rating, criticizing the growing budget deficit. Notably, the rating downgrade adds extra risk for stock investors, who are already concerned about recession risks and the high growth of stock markets this year. Some economists point out that the market is merely seeking reasons to lock in profits. However, it is unlikely that Fitch's rating downgrade will continue the stock market sell-off at this time. More likely, the increasing risk of an economic downturn will trigger a move away from risky assets.

The trend of index declines started yesterday amid disappointing data from China and the US. Shortly after the rating downgrade, Treasury Secretary Janet Yellen stated that the downgrade from AAA to AA+ should not harm the top-tier status of US assets in the long run, citing the absence of alternatives and confident economic growth.

A similar event occurred in 2011 when S&P Global Ratings downgraded the US rating after a previous debt ceiling crisis. Although it caused a sell-off in risky assets, it did not last long enough.

Economists from UBS Global Wealth believe that the current rating downgrade provides no new information and should have a limited impact on the market. Many major holders of Treasury bonds, such as funds and index-tracking companies, are likely already prepared for this step to avoid forced sales of their existing assets. The demand for safe-haven assets amid concerns about the rating downgrade may also support Treasury bonds in the short term, as stated in UBS Global Wealth's statement.

In other markets, oil continued its rally after industry estimates indicated a massive reduction in US reserves. The gold market experienced a slight correction within a sideways channel, but the technical picture remained largely unchanged.

Regarding the S&P 500 index, the demand for the trading instrument remains strong. Bulls have a chance to continue the uptrend, and they need to fix the price above $4,582. From this level, there might be a surge to $4,609. A no less important task for bulls will be to maintain control over $4,637, which will strengthen the bullish market. In case of a downward movement due to decreased risk appetite, bulls should protect $4,582. A breakthrough of this level may push the trading instrument back to $4,557 and $4,539.