Fitch Downgrades US, Gold Tumbles, RBA Holds Rates Steady

Global markets experienced a downward trend as Fitch downgraded the US sovereign rating, leading to a surge in dollar yields and a drop in gold prices. Meanwhile, the Reserve Bank of Australia (RBA) and the Bank of Japan (BOJ) surprised analysts with their monetary policy decisions. Additionally, the energy markets saw significant activity, with crude inventories witnessing a historic drop.

Key Factors for Today

• The US Treasury announced a substantial $1.0 trillion debt issuance this quarter, leading to an increase in dollar yields and a significant decrease in gold prices.
• Fitch downgraded the rating of US government bonds to AA+ from AAA, citing concerns about fiscal deterioration and repeated debt ceiling negotiations.
• The Reserve Bank of Australia (RBA) held its interest rates steady at 4.1%, defying expectations of a hike, and stated that further tightening might still be necessary.
• The Bank of Japan (BOJ) released minutes emphasizing the importance of avoiding a rate spike caused by exiting ultra-easing policies.
• The American Petroleum Institute (API) reported a major drop in crude oil inventories, the largest since the pandemic began.

Market Movers

• Gold prices lost over 1% after Fitch's rating cut, closing at $1945/oz.
• The benchmark ten-year US Treasury yield rose above 4% following the rating downgrade.
• The Australian dollar (Aussie) crashed 1.55% against the USD after the RBA's decision to hold rates steady.
• Japanese government bonds (JGB) reached their highest level in nine years after the BOJ widened the YCC band.
• WTI crude oil continued its 4-day winning streak, with bulls eyeing April's peak of $83.40/bbl.
• USD/JPY rose to a 3-day streak at 143.3, targeting 144.00 next.

Economic Calendar

• ADP Employment Change
• EIA Crude Oil Stock Change
• Judo Bank Services PMI Final
• Jibun Bank Services PMI
• Caixin Services PMI

The Big News

Fitch's Downgrade of US Sovereign Rating Sparks Global Market Turmoil

Fitch's decision to downgrade the US sovereign rating to AA+ sent shockwaves through global markets. The rating agency cited concerns over the country's fiscal trajectory for the next three years and the recurring debates around the debt ceiling. The downgrade was anticipated after Fitch's warning in May, but it still had significant implications for investors, leading to a surge in dollar yields and a subsequent drop in gold prices. Market participants are now closely monitoring how this rating cut will impact US borrowing costs and investor sentiment moving forward.

RBA Surprises Analysts, Holds Rates at 4.1% Amidst Economic Uncertainties

The RBA's unexpected move to keep interest rates at 4.1% surprised many analysts who had anticipated a rate hike. The central bank clarified that further tightening may be necessary but wanted to assess the impact of past rate increases before proceeding. This decision resulted in a sharp decline in the Aussie, which struggled to maintain the 66-cent barrier against the USD. The RBA's cautious approach suggests a close watch on inflation data and economic indicators in the coming months.

BOJ's Strong Commitment to Ultra-Easing as YCC Widening Impacts JGB Yields

In Japan, the BOJ's minutes revealed a strong commitment to maintaining its ultra-easing policies to avoid a sudden spike in interest rates. The central bank's recent decision to widen the YCC band has led to rising JGB yields. BOJ officials, including Deputy Governor Shinichi Uchida, have reiterated their intent to continue easing without disruptions to support the economy.

Energy Markets Surge as API Reports Historic Drawdown in Crude Inventories

The energy markets witnessed significant activity as well, with API reporting an unexpected drawdown of 15.4 million barrels in crude inventories, marking the largest drop since the pandemic's onset. WTI crude oil prices continued to rise, with bullish sentiment targeting April's peak.