Moody's Downgrade Sends U.S. Stocks, Dollar Plunging

Investors are facing a new wave of debt-related anxieties following the announcement by Moody's to downgrade the United States' AAA credit rating. This decision has led to a significant drop in U.S. stock index futures and the dollar, while pushing up U.S. Treasury yields. During the Asian trading session on Monday, the 30-year Treasury yield briefly touched the critical 5% level, and the dollar index fell below 101, dropping more than 0.5%.

Despite the initial market reaction, U.S. stocks managed to close slightly higher. Federal Reserve Vice Chairman John Williams stated that there were no signs of a massive withdrawal of assets from the U.S. Some institutions advised investors to seize the opportunity to buy on the dip.

The U.S. government has been vocal in its support for the market. A major financial institution's head of foreign exchange strategy noted that the recent sell-off of U.S. Treasuries and the dollar is a rare instance of the market penalizing the U.S. for its fiscal recklessness. He suggested that the market could experience a "Liz Truss moment" in the coming months, which would further depress the dollar and U.S. assets. He compared the situation to that of an emerging market, where rising yields, currency depreciation, and a falling stock market are not typical of the U.S.

An analyst at a global asset management firm warned that Moody's downgrade could exacerbate concerns about U.S. sovereign debt and fuel a "sell America" sentiment driven by the escalating trade war. In response to these concerns, the director of the National Economic Council asserted that U.S. Treasuries remain the safest bet in the world. He dismissed Moody's decision as a retrospective punishment for the reckless spending of the Biden administration.

John Williams, the president of the Federal Reserve Bank of New York, acknowledged that investors are considering how to invest in U.S. assets. He noted that recent rumors or concerns about the condition of dollar assets have been evident, but there has been no significant change in the way foreign funds flow into the Treasury market. He emphasized that the economy is performing well, despite some indicators suggesting potential future problems. Williams also noted that the impact of Trump's import tariffs and other policy changes will take time to fully understand.

Institutions have advised investors to buy on the dip. The downgrade by Moody's has highlighted broader global concerns about U.S. assets amid changing tariffs and the potential for increased market debt from upcoming tax and spending legislation. Unlike previous instances, this time, the market is not entirely pessimistic. The chief equity strategist at a major investment bank mentioned Moody's credit rating downgrade in his weekly research report. He focused on the temporary trade agreement between the U.S. and China and the prospects for further stock index rebounds.

He noted that the correlation between stock returns and bond yields has decreased from 0.6 to nearly 0. He suggested that the downgrade by Moody's is worth considering, as it is the last agency to downgrade the U.S. from a AAA credit rating, a process that began in the summer of 2011. He predicted that a 10-year yield exceeding 4.50% could lead to moderate valuation compression, and advised buying on the dip. The investment bank expects the core personal consumption expenditures (PCE) inflation to start rising in May and continue to increase throughout the summer.

He also highlighted the unexpected positive factor of a significant reduction in bilateral tariffs between the U.S. and China, combined with the upward trend in earnings revisions, which has brought the S&P 500 index back to the 5500-6100 point range. However, he cautioned that without recession data, it is difficult to see the Federal Reserve's monetary policy becoming more accommodative, and the 10-year Treasury yield falling below 4% to achieve a more sustained rebound.

Similarly, a major international bank released a report stating that the drop in the S&P 500 index due to Moody's downgrade presents a potential opportunity until the 10-year Treasury yield reaches the danger zone, defined as above 4.70%. Following the announcement of Trump's tariff plan on April 2, the S&P 500 index briefly fell to the brink of a bear market. As the government rolled back the most severe measures, the stock market rebounded sharply, with the S&P 500 and Dow Jones indices recovering all their year-to-date losses. Given the breadth and depth of the rally, this could be a catalyst for a pullback or consolidation, but the market's interpretation of the downgrade remains to be seen.

A partner at a global asset management firm noted that the S&P 500 index falling to above 5900 points indicates that this is not a full-blown panic. He suggested that while bears have an opportunity, bulls are still defending key levels.