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Markets slump on U.S. credit rating downgrade

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Global financial markets are showing signs of increased caution, causing stocks to decline.

The S&P 500 began with a 1% decline in early trading, reflecting losses in European and Asian stock markets.

As of 9:50 a.m. Eastern time, the Dow Jones Industrial Average had fallen by 370 points or 1% to reach 35,102. Meanwhile, the Nasdaq composite was down 1.3%.

Moody’s downgrade of credit ratings for several smaller and mid-sized U.S. banks led to a drop in bank stocks. The credit rating agency expressed concerns about the financial strength of these banks.

In Asia, the Hong Kong stock market decreased by 1.8%, and the Shanghai stock market dropped by 0.3% following a report that indicated China’s economy had experienced the largest decline in exports since the beginning of the pandemic in 2020.

These market concerns are compounded by mixed earnings reports from major U.S. companies.

United Parcel Service (UPS) shares fell by 3% after the company lowered its revenue forecast for the year. While the company reported stronger profits for the spring, its revenue was weaker.

Eli Lilly, however, managed to mitigate the market losses by surging 16.4%. The pharmaceutical company exceeded analysts’ expectations for both profit and revenue during the spring.

Further market volatility is expected in the near future.

Later in the morning, the U.S. government will release job opening data for June, providing insights into the resilience of the job market.

Economists anticipate another report to reveal ongoing challenges in U.S. manufacturing due to higher interest rates.

With the Federal Reserve’s recent increase in its main interest rate, the central bank aims to manage inflation. However, high interest rates have negatively affected various sectors, particularly banks. The quick rise in rates has hurt industry profits and devalued investments made during periods of lower rates.

This environment contributed to high-profile bank failures earlier in the year and has increased concerns about banks with substantial commercial real estate loans, which are suffering due to the lingering threat of a U.S. recession and the continuation of remote work trends.

Big banks hit

The implications of Moody’s credit rating cut have also impacted larger banks. JPMorgan Chase shares fell by 2%, significantly impacting the S&P 500 index.

In the coming days, the U.S. government will release data on consumer and wholesale inflation, potentially influencing the Federal Reserve’s future decisions regarding interest rates.

Market participants are hopeful that the decline in inflation since its peak last summer will convince the Federal Reserve that inflation is under control, reducing the need for further rate hikes.

Economists project that July’s consumer prices will rise by 3.3% compared to the previous year, which represents an acceleration from the 3% increase reported for June.

Inflation challenge

Despite this optimism, some economists and investors caution that achieving the Fed’s target of 2% inflation moderation may be challenging. They argue that Wall Street may have prematurely embraced the idea of a “soft landing” for the economy and that the strong performance of the S&P 500 index in the first seven months of the year may have been excessive.

In response to the market’s uncertainty, investors are flocking to safer investments, causing Treasury yields to fall. The 10-year Treasury yield dropped to 3.98% from 4.10%, impacting mortgage and loan rates. The two-year Treasury yield, which closely reflects expectations for the Federal Reserve’s actions, decreased to 4.73% from 4.79%.

 

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Australian Treasurer and RBA chief clash over economy

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A rare dispute has emerged between Australia’s Treasurer Jim Chalmers and Reserve Bank Governor Michele Bullock over the nation’s economic trajectory.

Governor Bullock argues the economy remains overheated, even as growth data shows recent slowdowns.

Treasurer Chalmers, however, warns that sustained high interest rates are “smashing the economy.”

This debate is critical for Australians, as it will influence the future of interest rates and inflation.

Data shows a mixed economic picture: while inflation is down, it’s still above target, and the jobs market remains historically strong.

Ultimately, deciding who’s right may come down to theory and perspective on economic health.

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Central bank expected to ease interest rates as election nears

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The Federal Reserve is expected to cut interest rates again this week, a move aimed at cooling inflation.

This quarter-point rate cut would bring the benchmark rate to about 4.6%, the second reduction this year.

Analysts expect that additional cuts could come in December, which would benefit borrowers by reducing loan costs.

If Trump were to win the election, economists say his proposals on trade and immigration could reignite inflation.

The Fed is balancing a strong economy and low unemployment with its inflation-calibrated rate cuts.

As Election Day approaches, all eyes are on both the Fed and the presidential race.

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Big Tech pushes AI investments

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Tech giants like Microsoft and Meta are accelerating AI data center spending, with massive capital pouring into these projects.

Microsoft and Meta reported on Wednesday that AI investments are spiking their expenses, while Alphabet announced similar trends.

Amazon, due to report earnings shortly, is expected to mirror these projections, foreseeing further pressure on profit margins.

Wall Street is getting wary of the financial strain, as each company’s stock took a hit this week despite strong quarterly numbers.

Shares of Meta fell over 3%, and Microsoft saw a 6% drop, underscoring Wall Street’s jitters.

“It’s expensive to keep up with AI technology demands,” says GlobalData’s Beatriz Valle, emphasising a competitive race in AI capacity.

The high-stakes investments are starting to test investor patience in Big Tech’s ambitious AI journey.

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