Black Wednesday! These are the "final three straws" that crushed the US stock market.

Global financial markets experienced a "Black Wednesday" as the US stock market plummeted across the board.

Overnight, the S&P 500 index fell 1.4%, while the tech-heavy Nasdaq Composite Index dropped 2.2%, marking the worst single-day performance since February. The Dow Jones Industrial Average, however, only declined 1%, performing relatively better among major stock indices.

Most media outlets attributed this sharp decline in the US stock market to the downgrade of the US rating by Fitch.

On Tuesday, August 1st, Fitch, one of the three major rating agencies, downgraded the long-term foreign currency debt rating of the United States from AAA to AA+. This is the second time the US has been downgraded since Standard & Poor's downgraded its rating in August 2011. (source)

As a result, US stocks opened lower on Wednesday, with the Nasdaq dropping 150 points at the opening.

However, compared to the "earthquake" caused by the downgrade twelve years ago, the market volatility on the day of the downgrade was relatively small. Especially in the bond market, the US sovereign risk remained unaffected.

Some investors expressed that although the US rating was downgraded, they are not concerned about the credit status of the United States. Jamie Dimon, CEO of JPMorgan Chase, stated that investors do not need to worry too much as the US has the "best economy in the world."

However, many analysts have issued warnings about the hidden risks in US debt.

Steven Ricchiuto, Chief US Economist at Mizuho Securities, said: "This basically tells you that there is a problem with the US government's spending. This is an unsustainable budget situation because even economic growth cannot escape this problem. Therefore, they will have to address this issue or accept the potential consequences of further downgrades."

The latest "mini non-farm" ADP data unexpectedly exceeded expectations, dampening the hopes of investors for a rate hike in September.

On Wednesday, August 2nd, the US ADP employment report showed that the number of private sector jobs in the US increased by 324,000 after seasonal adjustments in July, far exceeding the expected 190,000 and lower than the 497,000 increase in June.

Some analysts believe that the "weak" non-farm payroll data from last month may be unusual. The current ADP survey shows that employment increased by 324,000 in July, significantly exceeding economists' expectations of 200,000 new non-farm jobs this Friday. ADP's strong performance poses some upward risks to the non-farm data.

The US labor market remains hot, and the path of the Fed's rate hike in September is more uncertain. The CME FedWatch Tool shows that the probability of no rate hike in September has slightly decreased to around 80%, while the probability of a 25 basis point rate hike has increased to around 20%.

In addition, a piece of news from the US Treasury shocked the market on the same day.

On Wednesday, the US Treasury announced its quarterly refinancing plan, raising the size of long-term bond auctions for the first time in two and a half years. The newly announced total amount of refinancing bonds issued is $103 billion, higher than the $96 billion in the previous quarter in May, slightly higher than the $102 billion disclosed by the media earlier this week.

As expected by traders, the US government also plans to issue debt of various maturities on a larger scale.

With the government's large-scale debt issuance plan, the unexpectedly strong ADP employment data, and the Fitch downgrade event, these three forces have converged, delivering the heaviest blow to US stock investors.

Accumulated Risks in the US Stock Market

Risks in the US stock market have been accumulating for a long time, and it takes time for them to build up.

Wall Street CN mentioned in a previous article that data from last week showed that the gap between the S&P 500 index and the 10-year US Treasury yield was only 1.1 percentage points, the lowest level since 2002. In addition, the gap with 10-year inflation-protected Treasury bonds has fallen to the lowest level since 2003, at 3.5 percentage points.

This indicator has fallen to a 20-year low, threatening the recent rally in US stocks: stocks often need to demonstrate higher returns than bonds to compensate for their high-risk characteristics.

This narrowing trend in risk premium began to appear in the second half of last year, and despite the pressure from the Fed to raise interest rates to combat inflation, the stock market has remained stable.

Analysts generally believe that over time, the risk premium will return to average levels. Historically, this adjustment is usually due to uncertain profit prospects for companies.