Fitch Rating - U.S. ‘AAA’ rating remains on negative watch 🥇

Despite the resolution of the U.S. debt limit impasse, Fitch Ratings continues to have a negative watch on the U.S. rating. While the agreement to suspend the debt limit until 2025 and introduce spending caps is viewed positively, Fitch is concerned about the long-term fiscal and debt outlook, as well as the implications of recurring political standoffs. Although the agreement is expected to result in $1.5 trillion in savings over the next decade, there has been a gradual decline in governance over the years, leading to increasing fiscal deficits and debt burdens.

Fitch recognizes the outstanding strengths of the United States, including its robust economy, high GDP per capita, and the U.S. dollar's status as the world's primary reserve currency. However, the agency highlights the risks posed by governance deficiencies and political polarization, which could potentially erode these strengths. Fitch intends to address the negative watch in the third quarter of 2023, focusing on assessing the coherence and credibility of policymaking, as well as evaluating the expected medium-term fiscal and debt trajectories.

This week, the stock market and bond yields have been moving in the same direction. This correlation should be a cautionary signal for investors, as historically, during this bear market cycle, bond yields and the stock market have been negatively correlated. Whenever bond yields have risen, it has typically indicated a drop in stock indices. The current market state is volatile, and the coming weeks should reveal the direction that Wall Street will take.