U.S. Stocks, Bonds Plunge After Credit Rating Downgrade

On May 19, the U.S. experienced a significant downturn in both its stock and bond markets. The three major U.S. stock index futures all declined, with the Dow Jones Industrial Average futures dropping nearly 400 points and the Nasdaq futures falling by 1.4%. Concurrently, the U.S. Treasury yield curve steepened, with the 10-year Treasury yield rising to 4.526% and the 30-year Treasury yield reaching the psychologically significant 5% mark.

This market turmoil followed a decision by a major credit rating agency to strip the U.S. government of its highest credit rating. The agency cited the ballooning budget deficit, which shows no signs of shrinking, as the primary reason for the downgrade. The market's growing concerns over the U.S. economic outlook and fiscal deficit led to a surge in risk aversion, driving up the price of gold.

This downgrade could exacerbate Wall Street's concerns about the U.S. sovereign debt market and reignite the "sell America" sentiment that emerged during the trade wars initiated by the previous administration. The timing of the downgrade coincides with the U.S. Congress debating additional unfunded tax cuts, while the current administration is renegotiating trade agreements, potentially slowing down the economy.

An investment strategy director from a prominent bank in Singapore noted that this downgrade could intensify market worries about the erosion of America's exceptionalism advantage, making non-U.S. assets more attractive to global stock market investors, particularly those who have already shifted funds from U.S. stocks to markets like Europe.

The credit rating agency acknowledged the U.S.'s significant economic and financial strengths but stated that these advantages are insufficient to offset the deteriorating fiscal indicators. The U.S. Treasury Secretary downplayed concerns about U.S. debt and the inflationary effects of tariffs, asserting the administration's commitment to reducing federal spending and promoting economic growth.

An investment strategist from a leading market research firm in Singapore suggested that the downgrade is more symbolic than indicative of fundamental changes, but it does undermine market confidence, especially with debt and deficit issues under scrutiny. There is also a risk that such events could be politicized.

On the same day, the Chinese mainland stock market experienced volatility, with the three major indices showing mixed performance. By the end of the trading day, the Shanghai Composite Index closed flat, the Shenzhen Component Index fell by 0.08%, and the ChiNext Index declined by 0.33%.

Most individual stocks rose, with 3,564 stocks gaining and 121 stocks hitting their daily limit. Conversely, 1,692 stocks fell, with none hitting their daily limit. Concept stocks related to mergers and acquisitions saw significant gains, with multiple stocks hitting their daily limit. The real estate sector also performed strongly, with companies like Huaxia Happiness, Far East Real Estate, and Shahe Stock all hitting their daily limit. The shipping sector continued its strong performance, with companies like Ningbo Port, Lianyungang Port, and Zhuhai Port all hitting their daily limit.