IXIC: Nasdaq Futures Turn Lower After US Credit Rating Gets Slapped with Downgrade

Quick catch-up: Nasdaq is coming hot off a five-day winning streak, capping a 7.2% weekly gain. What’s credit rating and why is it important?

🔔 Stock Futures Slide

• Futures on the Nasdaq Composite index IXIC were staring at a lower open Monday morning after credit agency Moody’s on Friday tweaked the US credit rating to the downside. It was just a notch — from Aaa to Aa1 — but it was enough to kick America out of the top echelon.
• The reasoning behind? “Financing challenges” related to soaring budget deficits and the mounting cost of rolling over existing debt in a still-high interest rate environment.
• In practice, this means that Uncle Sam is racking up bills faster than he can afford and paying them off is expensive. But then again, the US could vote to raise the debt ceiling and keep kicking the can down the road.

📈 All Three Indexes Winning

• The souring mood arrived just as trading enthusiasts were basking in a post-trade-deal rally. The Nasdaq Composite, highly sensitive to economic shifts, was poised to open today’s cash session lower by 1.3%. The S&P 500 was down 1% and the Dow Jones had slumped 0.8% ahead of the bell in New York.
• It’s worth looking back, though. A quick glance over the past week shows the Nasdaq enjoyed a whopping 7.2% weekly gain, leading the pack of three and capping a full week of uninterrupted gains.
• The S&P 500, which just recently turned positive for the year, also notched a five-day winning streak, rising 5%. The 30-stock Dow Jones added 3% last week and just crossed the flatline into the green for the year on Friday.

💡 What’s Credit Rating?

• What’s so special about credit ratings and why the adverse investor reaction? A credit rating is like a report card for a country’s financial health — it aims to tell people (investors, mostly) how likely it is that the government will pay back its debts.
• A lower rating score could make borrowing more expensive and result in rising bond yields (and lower bond prices) along with higher consumer loans due to relatively high interest rates.
• In a nutshell, investors are getting more cautious now that Moody’s has slapped the US with a downgrade — maybe a needed reprieve after a hot week of rallying across the board? After all, America is sitting on nearly $37 trillion in debt and the debt-to-GDP ratio is at 124% — figures that can’t be ignored forever.