Futures Slide, Yields And Gold Jump As Markets React To Moody’s Downgrade

US equity futures and bond yields are sharply higher across the curve as market react to Moody’s greatly delayed downgrade to US credit on Friday (it follows 14 years after S&P did the same in August 2011), with the USD trading broadly lower, gold higher and macro credit trading notably wider. As of 8am ET, S&P 500 contracts fell 1.0% and Nasdaq 100 futures down 1.4%, with investors cooling on equities after a five-day winning streak, and up 7 of the past 8 days. Pre-mkt, MegaCap Tech names are down 2-4% with Semis/Cyclicals under pressure. European and Asian shares also dropped. The yield curve is bear steepening with the 30Y yield surpassing 5% and hitting its highest level since Nov 2023 and the USD selling off: the euro rose as much as 1.1% as all major currencies advanced against the greenback. Commodities are mixed with energy/base lower and precious/ags higher. Looking ahead today, there are no major economic data releases. Fed voters Williams, Jefferson, and non-voters Logan, Kashkari and Bostic are scheduled to speak today. 

In premarket trading, Mag 7 stocks are lower as risk appetite broadly falters (Tesla -3.5%, Nvidia -2.7%, Meta Platforms -1.9%, Alphabet -1.8%, Amazon -1.8%, Apple -1.5%, Microsoft -0.9%). Nvidia is in focus after CEO Jensen Huang showed new technologies from faster chip systems to software aimed at sustaining the AI boom at Computex in Taiwan. Alibaba shares slumped in Asia after a report that the Trump administration has raised concerns over its potential AI deal with Apple. Cryptocurrency-linked stocks including Coinbase, Robinhood and MicroStrategy fall, tracking the price of Bitcoin lower amid the risk-off mood. Here are some other notable premarket movers:

• Alibaba ADRs (BABA) fall 2.3%, following Hong Kong shares lower, after the New York Times reported that the Trump administration has raised concerns over Apple’s potential deal with the Chinese tech giant
• Novavax (NVAX) shares rally 12% after the US FDA approved the drugmaker’s Covid-19 vaccine for adults 65 years and older as well as those aged 12 to 64 years who have at least one medical condition that puts them at a higher risk of severe illness from Covid
• Reddit (RDDT) shares are down 6.4% after the web forum operator is downgraded to equal-weight from overweight at Wells Fargo, with analysts saying that recent user disruptions are likely to be more permanent as Google “more aggressively” implements AI features in search

Global markets are slower after Friday’s Moody’s downgrade of the US credit rating to Aa1 (vs AAA prev), which was attributed to “increased interest payments on debt, rising entitlement spending, and relatively low revenue generation. While markets have reacted this AM, Goldman notes that Moody’s has had a negative rating outlook since November 2023, and has lagged the other two major rating agencies, S&P and Fitch, in the downgrade to AA+. Bessent comments yesterday are also helping price action, with the Treasury Sec noting that Liberation Day tariffs may be reimposed if countries do not negotiate “in good faith” before the 90 day pause expires on July 9th. 

Monday’s pullback comes after the S&P 500 saw a nearly 20% rally from April lows, and the market was probably ripe for a retreat after such a V-shaped bounce.

Besides the sellin in stocks, we have also seen a concurrent slide in rates, with 30-year Treasury yields hitting 5.03%, at the highest since November 2023. As Bloomberg notes, the 30-year yield is in an uptrend since the March 2020 low, broke the long-term channel downtrend dating back to 1987 peak in December 2022.

Morgan Stanley’s Michael Wilson said investors should buy dips triggered by rising yields, as the trade truce between China and the US has lowered the odds of a recession. Among other strategists, Goldman’s David Kostin said Mag 7 stocks are likely to outperform this year, driven by robust earnings growth. RBC’s Lori Calvasina, however, sees more cuts to S&P 500 earnings estimates ahead, and said the market may be “a little ahead of itself from a fundamental perspective.”

“The current level of yields on US Treasuries doesn’t feel out of touch with economic fundamentals,” said Stephane Deo, senior portfolio manager at Eleva Capital in Paris. As for equities, “it feels very normal to me that the market needs a breather and the Moody’s downgrade is good excuse for doing just that.”

With the US deficit in focus, investors will also be parsing Trump’s giant tax and spending package. A key House committee advanced the legislation late Sunday night after Republican hardliners won agreement from party leaders to speed up cuts to Medicaid coverage.

In Europe, the Stoxx 600 falls 0.7% with technology shares the worst performers, followed by mining and real estate names; Estoxx 50 is down 0.7% with underperforming sectors including consumer discretionary and info tech. Here are some of the biggest European movers:

• Ryanair shares rise as much as 5.4% to a record high. The budget airline gave strong commentary ahead of the key summer season and announced a €750m buyback.
• Diageo shares gain as much as 2.9% after the maker of alcoholic beverages saw third-quarter sales beat estimates, with analysts reassured by the company maintaining its full-year guidance.
• Genuit Group shares rise as much as 3.5% after the plastic pipe maker said trading was in line with expectations over the opening four months of the year, and noted “encouraging” signs of recovery in the UK market.
• Romania’s BET index gains 4.6% after Nicusor Dan, the centrist mayor of Bucharest, won presidential runoff on Sunday, quashing the ambitions of a far-right Donald Trump loyalist.
• Mota-Engil shares rise as much as 6.4% to €4.4, the highest intraday price since April 2024, after JB Capital raised its target price on the infrastructure construction firm.
• Pierer Mobility shares rally as much as 21% in Zurich after co-owner Bajaj Auto signs loan deal before deadline to fund restructuring at KTM unit.
• Euronext shares drop as much as 3.2% after downgrades from JPMorgan and Keefe, Bruyette & Woods. JPMorgan notes the bourse operator’s “phenomenal rally” since the start of last year.
• Ithaca Energy shares fall as much as 9.1% as Jefferies downgrades the stock to hold, saying the performance so far this year means they now trade at a premium to the broker’s valuation.
• Getlink shares slip as much as 2.9% after the Eurotunnel operator suspended its electricity interconnector between France and the UK for two weeks.
• Kainos shares fall as much as 7.3% after the UK reseller of Workday software reported a 10% drop in bookings for its fiscal year ended March 31, citing a “challenging” year.
• Poland’s WIG20 index slips as much as 1.7% after the ruling party candidate Rafal Trzaskowski secured only a narrow win over a pro-Donald Trump opponent in the first round of presidential elections.
• Pantheon Resources shares sink as much as 46% to the lowest since December after the oil and gas company reported further disappointing flow testing results for its Megrez-1 well in Alaska.

Earlier in the session, Asian stocks were set for their longest run of losses in over a month, with tech shares leading the retreat following Moody’s downgrade of the US’ credit rating. The MSCI Asia Pacific Index dropped 0.2% to head for a third day of declines, the longest streak since April 7. Chipmakers TSMC and Samsung were among the biggest drags as Treasury yields advanced. Alibaba’s shares slid after a report said that the Trump administration has raised concerns over Apple’s potential deal with the company on AI features. South Korea’s benchmark fell the most in a month, while gauges in Taiwan and Australia also slipped.

Moody’s downgrade “hammers home questions about the appropriate value of US government debt and begs the question whether the downgrade may shift investment mandates by portfolio managers, treasurers and other investors,” said Kyle Rodda, a senior market analyst at Capital.com. “A weak batch of Chinese economic data weighed on market sentiment slightly.”

In FX, the Dollar is starting off the week on the backfoot, weighed on by the Moody downgrade on Friday and weekend headlines from Bessent. EUR is leading gains, trading 100 bps higher as FX vols turn bid across G10 pairs with EUR 1m now trading at 8.4vols (+0.9v overnight). JPY is also gaining this morning (+60bps vs USD) as short dated downside remains bid while people add positions over the Kato-Bessent meeting later this week with ~35bp implied gap in USDJPY. Despite the broadly weaker Dollar this morning and the lowest USDCNY fix since early April (7.1916), USDCNH is trading flat after local data came in weaker than expected. Activity weakened in April, reflecting both the negative impact of increased US tariffs and still-soft domestic demand. Our economists now forecast USDCNY to gradually move lower through the year, shifting from a headwind to a tailwind to many EM currencies, for which the cross is an important anchor. EM currencies that can benefit the most in this environment are those (i) with a larger undervaluation signal, (ii) with a positive beta to CNY and to risk more broadly, (iii) where conversion of USD deposits can have large flow impacts, and (iv) where carry contributes positively to total returns.

In credit, macro credit is opening the first trading session of the week notably wider in sympathy with equity futures, after closing Friday a touch firmer in an underperformance relative to equities in the risk-on tape. As a whole, last week saw CDX IG move over -7bps tighter and CDX HY rise nearly +1.75pt following positive developments on the US/China trade tariff negotiations front. Sharp downward price action in the distressed credit universe (NFE Inc, LINTA, SAGLEN) were front and center throughout the week on the micro front, some of which impacted CDX HY curves and led to some curve steepening. With CDX spreads back in the ~55bps neighborhood, the desk saw a resumption of hedge-setting demand both in one-delta and vol — with the latter continuing to be better bid, particularly tail.

In rates, treasuries near lows into the early US session, after extending Friday’s late selloff on the back of Moody’s Ratings stripping the US government of its top credit rating. Leading the selloff, 30-year yields top 5%, steepening the curve. 10-year Treasury yields advanced seven basis points to 4.54% and their 30-year equivalents rose about eight basis points to 5.02%. European rates are also higher while stock futures are under pressure ahead of the cash open. US yields are 1bp to 8bp cheaper across maturities, with 2s10s curve steeper by ~6bp, 5s30s by ~4bp; 10-year is near 4.55%, higher by 7bp since Friday’s close, with Gilts faring worse than their German peers. UK 30-year yields rise 9 bps to 5.49%. This week’s Treasury auctions include $16 billion 20-year new issue Wednesday and $18 billion 10-year TIPS reopening Thursday. 

In commodities, oil prices are lower ahead of a phone call between US President Trump and Russian President Putin later on Monday. WTI is down 0.6% at $62.10 a barrel. Meanwhile, gold rose 1.2% or $36 to around $3,240/oz, with appetite for the haven asset boosted by concerns about the US economic outlook.

Today’s US economic data calendar includes April leading index (10am). Fed speaker slate includes Bostic (8:30am, 2:45pm), Jefferson and Williams (8:45am), Logan (1:15pm) and Kashkari (1:30pm)

Market Snapshot

• S&P 500 mini -1.0%
• Nasdaq 100 mini -1.4%
• Russell 2000 mini -1.6%
• Stoxx Europe 600 -0.7%
• DAX -0.3%
• CAC 40 -0.8%
• 10-year Treasury yield +7 basis points at 4.55%
• VIX +2.5 points at 19.74
• Bloomberg Dollar Index -0.6% at 1224.79
• euro +0.9% at $1.1267
• WTI crude -0.6% at $62.14/barrel

Top Overnight News

• US President Trump said he would be willing to travel to China to speak with Chinese President Xi regarding foreign policy and economic issues. It was separately reported that President Trump said Walmart (WMT) should stop trying to blame tariffs as the reason for raising prices throughout the chain, while he added that between Walmart and China, they should “eat the tariffs” and not charge valued customers anything.
• US VP Vance said Europe is an important ally of the US but disagreements on trade, while he hoped the meeting in Rome with European Commission President Von der Leyen would lead to long-term trade negotiations and trade advantages.
• US VP Vance discussed with Canadian PM Carney the shared interests and goals of the US and Canada including fair trade policies and the continued lasting relationship between the two countries.
• US Treasury Secretary Bessent said regarding new tariff rates that countries are coming up with very good proposals with few exceptions and the timing of deals depends on whether countries are negotiating in good faith, while he thinks they will do a lot of regional deals. Furthermore, he said countries will get a letter with a US tariff rate if they are not negotiating in good faith and he thinks that rate would be the April 2nd level, according to interviews with CNN and NBC.
• US-China trade truce and China’s prior defiant stance in negotiating with the US is said to have convinced some countries they need to take a tougher position in their own negotiations with the Trump administration, according to Bloomberg.
• Australian PM Albanese said he is “up for a deal” with Europe on free trade following years of trade discussions, according to Bloomberg.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly subdued following the US sovereign rating downgrade by Moody’s which spurred a mild ‘sell America’ impulse, while participants also digested mixed Chinese activity data. ASX 200 declined with underperformance in the commodity-related sectors but with the downside stemmed ahead of tomorrow’s RBA rate decision in which money markets are pricing around a 99% likelihood of a 25bps cut. Nikkei 225 retreated amid currency-related headwinds while the data calendar for Japan is very light to start the week and BoJ Deputy Governor Uchida stuck to the script in which he maintained the rate hike signal should prices improve as forecast. Hang Seng and Shanghai Comp were lacklustre amid the glum mood across the Asia-Pac region but with the downside in the mainland limited after mixed Chinese data in which Industrial Production topped forecast but Retail Sales disappointed, while the latest House Prices continued to contract Y/Y albeit at a slightly slower than previous pace.

Top Asian News

• Nomura raises China’s 2025 GDP forecast to 4.5% (prev. 4.0%).
• South Korean presidential front-runner Lee said ties with Russia and China are also important, while he also stated that South Korea should not go all in on the alliance with the US and there is no need to rush a trade agreement with the US.
• US White House and Congressional officials reportedly scrutinised in recent months Apple’s (AAPL) plan to strike a deal to make Alibaba’s (9988 HK) AI available on iPhones in China.
• China’s NDRC cuts retail fuel prices by CNY 230/t for Gasoline, CNY 220/t for Diesel; effective Tuesday 20th May.

European bourses (STOXX 600 -0.5%) opened lower across the board and have been trading sideways throughout the morning. Pressure which follows on from a mostly negative APAC session, stemming from Moody’s downgrading the US. European sectors opened mixed but now display a mostly negative picture. Optimised Personal Care tops the pile, joined closely by Insurance and then Healthcare. Real Estate lags given the yield environment.

Top European News

• European Commission cuts EZ GDP growth forecast for 2025 to 0.9% (prev. 1.3% in Nov); sees 2026 growth at 1.4% (prev. 1.6%); risks tilted to the downside; 2025 Inflation seen at 2.1%, 2026 seen at 1.7%. Growth outlook revised significantly downwards amid weaker trade outlook and trade policy uncertainty. EZ growth forecast based on assumption of 10% US tariff on all EU goods, 25% on steel and aluminium on cars, no tariffs on pharma and chips.
• UK and EU Deal: Should work towards association of UK to the EU ERASMUS+ programme; continue efforts to support travel and cultural exchange; work towards a balanced youth experience scheme on terms to be mutually agreed. Should explore UK’s possible participation in EU’s internal electricity market. Work towards establishing a link between carbon markets.
• “Sky News has been told Brussels has dropped demands to link the duration of the agrifood deal to the one for fish – a key [UK PM] Starmer ask”, according to Sky News’ Coates.
• UK and the EU are expected to agree on Monday on a major post-Brexit reconciliation in which they will sign a security and defence partnership as the centrepiece of a “reset”, although some sticking points were said to remain with talks ‘going down to the wire‘, according to FT. More recently, Sky’s Coates posted “Sky News understands there was a late breakthrough on the deal and that you expect news on it mid morning. Talks went well post midnight last night”.
• EU and UK negotiators reportedly reached an outline deal to strengthen ties; deal needs political sign off, according to Bloomberg sources.
• EU capitals have reportedly agreed to launch a EUR 150bln loans-for-arms fund which will be backed by the bloc’s joint budget, via FT citing sources; follows political agreement being secured this morning. Formal agreement expected on Wednesday.
• ECB’s Wunsch said the ECB may have to cut interest rates below 2% and noted that downside risks to growth and inflation have become bigger, while he currently sees no case for a half-point cut in the foreseeable future. Furthermore, he said the Euro area may be exposed to a negative economic shock in the short term which may be followed by a positive shock in 2026 and 2027, according to FT.
• ECB’s Schnabel said the ECB should remain cautious on interest rate moves and that a steady hand is needed for now, while she commented it is to be seen what will happen regarding a June cut and noted that declining energy prices and slowing global growth may lower inflation in the short term but could reverse in the medium term.
• Portugal’s incumbent centre-right party won the election with around 32% of the votes, while PM Montenegro said after the election win that another minority government is the most likely option.
• Portugal will appeal to the European Commission to pressure France over cross-border electricity links after a blackout last month, according to FT.
• Polish pro-EU candidate Trzaskowski was narrowly ahead in Poland’s first round presidential vote and will enter a run-off with right-wing rival Nawrocki.
• Fitch affirmed Greece at BBB: Outlook Revised to Positive from Stable.

FX

• USD is very much on the backfoot vs. peers after Moody’s downgraded the US sovereign rating, whereby the rating agency warning of government debt and a widening budget deficit. These concerns have been heightened by news that the House Budget Committee approved President Trump’s tax cut bill to set up a possible vote on the passage of the bill as soon as this week. Concerns over the final price tag of the bill has triggered a “sell US” theme at the start of the week. Data docket today is light, but Fed speak is heavy today with Bostic, Williams, Jefferson, Logan & Kashkari all due on the docket. DXY has slipped below last week’s low at 100.27.
• EUR is firmer vs. the USD and at the top of the G10 leaderboard as traders seek a liquid alternative to the USD. Newsflow out of the Eurozone over the weekend has mainly centered over ECB speak with ECB’s Wunsch stating that the ECB may have to cut interest rates below 2% and noted that downside risks to growth and inflation have become bigger. Elsewhere, ECB’s Schnabel said the ECB should remain cautious on interest rate moves and that a steady hand is needed for now. EUR/USD has ventured as high as 1.1273, currently near highs.
• JPY has been a beneficiary of the softer USD and downbeat risk sentiment with USD/JPY back below the 145 mark. Newsflow out of Japan has been on the light side following reporting late last week that Japan is holding out for a better trade deal with the US, which would include a full removal of 25% tariffs.
• GBP is one of the better performers across the majors with sentiment underpinned by news that the EU and UK have agreed an outline of a deal which will strengthen ties between both sides. As part of a post-Brexit reconciliation deal, they will sign a security and defence partnership as the centrepiece of a “reset”. Cable has eclipsed last week’s best at 1.3360 with a session peak at 1.3382.
• Antipodeans are both firmer vs. the broadly weaker USD but to a lesser degree than most peers alongside the subdued risk tone. Chinese data was mixed, in which Industrial Production topped forecast, Retail Sales disappointed and House Prices continued to contract Y/Y. Attention now turns to Tuesday’s RBA rate decision with the central bank widely-expected to deliver a 25bps rate cut.
• PBoC set USD/CNY mid-point at 7.1916 vs exp. 7.2057 (Prev. 7.1938).

Fixed Income

• USTs have started the week on the backfoot as the complex reacts to Moody’s cutting the US by one notch, joining S&P (cut August 2011) and Fitch (cut in 2023, after covid), with an AA1 rating. A cut which sparked on Sunday a sell-US trade. The announcement by Moody’s came amid US House Republicans blocking the passage of the Republican tax/spending bill due to concern that it would lift the short-run deficit. USTs themselves at the bottom of a 109-23 to 110-08 band, slipping from Friday’s 110-10+ close. Ahead, the US session is dominated by Fed speak, featuring Bostic, Williams, Logan and Kashkari.
• Bunds are also lower, with price action following the losses seen in the US. But there has been some updates for the bloc specifically, the main one of course being the EU-UK reset talks which appear to have gone well (see Gilts below for more). Elsewhere, political developments with the EU have been net-positive, but some uncertainties/risk points remain. Bunds just off the low of a 129.79 to 130.41 band, downside that accelerated as Friday’s 130.11 trough was lost. Support next at 129.59 from May 12th.
• Gilts are pressured and lagging peers amid the EU-UK updates, and also with focus on a 30yr syndication. The main development this morning was indications and since confirmation that there was a late-doors breakthrough on EU-UK reset talks, and an update is expected mid-morning once political sign off is attained. A press conference featuring UK PM Starmer and EU Commission President von der Leyen is currently set for 12:30BST. Gilts underperforming and lower by over 80 ticks at worst.

Commodities

• Subdued trade across the crude complex amid the broader downbeat sentiment across markets emanating from Moody’s downgrading the US’ rating, for the first time in over a century, from AAA to Aa1 – which effectively put it in line with the ratings by S&P and Fitch. In geopolitics, focus will be on a looming Trump-Putin call later today. Brent trades in a USD 64.69-65.60/bbl parameter.
• Positive trade across precious metals amid a leg lower in the dollar following the US sovereign rating downgrade by Moody’s, which spurred a mild ‘sell America’ impulse. Spot gold rose from a USD 3,206.72/oz low to test USD 3,250/oz to the upside.
• Little action was seen across base metals amid the overnight release of mixed Chinese data, in which Industrial Production topped forecast but Retail Sales disappointed, while the latest House Prices continued to contract Y/Y albeit at a slightly slower than previous pace. 3M LME copper currently resides in a USD 9,435.25-9,520.10/t range.
• EU will need to spend at least EUR 10bln more than last year to refill its gas reserves ahead of winter, after the first cold season in four years left its reserves heavily depleted, according to FT.
• Estonia’s Foreign Ministry said Russia detained a Liberia-flagged oil tanker after it left an Estonian Baltic Sea port.
• Oman’s Energy and Minerals Ministry signed an agreement with Occidental Petroleum (OXY) to amend and extend the Block 53 exploration and production sharing agreement.

Geopolitics: Middle East

• Israeli PM Netanyahu says “Israel will ‘take control of all’ of Gaza Strip”, via AFP.
• Iran’s Deputy Foreign Minister says Iran-US nuclear talks will fail if the US insists on zero enrichment, according to NourNews.
• Israeli airstrikes killed at least 100 in Gaza as negotiators sought a ceasefire, while Israel’s military said it began a wide ground operation in northern and southern Gaza.
• Israeli PM Netanyahu’s office announced that Israel will allow the entry of a basic quantity of food into Gaza to prevent a hunger crisis.
• Israeli PM Netanyahu’s office said Gaza talks in Doha now include ending the war or a truce and hostage deal, while it added that the end of the war must include Gaza demilitarisation, Hamas exile and the release of all hostages. However, a senior Israeli official said there was little progress in Gaza talks that include ending the war.
• Hamas confirmed a new round of ceasefire talks with Israel in Doha and said both sides are discussing all issues without preconditions, according to an official cited by Reuters. It was separately reported that a series of Israeli airstrikes last week killed the de facto commander of Hamas in Gaza, Muhammad Sinwar, according to reports by Israeli press on Sunday.
• Yemen’s Houthis claimed to target Israel’s Ben Gurion airport with a ballistic missile, although Israel’s military said it successfully intercepted the missile from Yemen, while Houthis announced on Sunday evening that it planned to target Israeli airports in the coming few hours.
• Iran’s President Pezeshkian questioned whether they should believe US President Trump, who speaks of peace and threatens Iran at the same time, while he added that Tehran will continue nuclear talks with the US but is not afraid of threats.
• Iran’s Supreme Leader Khamenei said US President Trump’s comments during his regional visit are an embarrassment and that the US must and will leave the region, while he also commented that Israel is a dangerous and deadly cancerous tumour which must be uprooted.

Geopolitics: Ukraine

• US President Trump said he will speak with Russian President Putin on Monday at 10:00EDT/15:00BST about stopping the bloodshed in Ukraine, while he will speak to Ukrainian President Zelensky and NATO members after. However, it was later reported that UK PM Starmer spoke with leaders of the US, Italy, France and Germany regarding the situation in Ukraine and catastrophic costs of the war to both sides, while they also discussed the use of sanctions if Russia failed to engage seriously in a ceasefire and peace talks.
• US President Trump said he thinks that they will make a deal with Russian President Putin and said he will use leverage against Putin if he has to, while he added that they have to meet and thinks they will probably schedule it, according to Fox News.
• US Secretary of State Rubio spoke with Russian Foreign Minister Lavrov and welcomed the prisoner exchange agreement reached, while Rubio emphasised President Trump’s call for an immediate ceasefire and an end to the violence. Furthermore, Lavrov discussed with Rubio further contacts between Russia and the US, while Lavrov noted the positive role of the US in the resumption of Russia-Ukraine talks.
• Russia’s Kremlin spokesperson said preparations are underway for a Putin-Trump conversation, while it stated that a Putin-Zelensky meeting could happen but only if certain agreements are reached.
• Russian negotiators at Istanbul talks demanded that Ukraine withdraw troops from all Ukrainian regions claimed by Moscow before a ceasefire can start, while they also demanded international recognition that five Ukrainian regions are Russian, neutrality for Ukraine, and no reparations, according to a Ukrainian official familiar with the talks.
• Ukrainian President Zelensky met with US VP Vance and Secretary of State Rubio on the sidelines of the Pope’s inauguration.
• Ukraine’s military said Kyiv was under a long-lasting drone attack. It was also reported that Ukrainian military intelligence agency said Russia plans to conduct a ‘training and combat’ launch of an intercontinental ballistic missile late on Sunday to intimidate Ukraine and the West.

Geopolitics: Other

• Turkish President Erdogan said it is possible to say that US sanctions on the Turkish defence sector have eased somewhat, while he added that NATO allies US and Turkey should not have restrictions in the defence sector.
• Taiwan Coast Guard said it does not rule out China launching political warfare to disrupt public morale ahead of President Lai’s inauguration anniversary on Tuesday.

US Event Calendar

• 10:00 am: Apr Leading Index, est. -0.94%, prior -0.7%

Central Banks Speakers

• 8:30 am: Fed’s Bostic Gives Opening Remarks
• 8:45 am: Fed’s Jefferson Gives Keynote, Bostic Moderates
• 8:45 am: Fed’s Williams Speaks in Moderated Discussion
• 1:15 pm: Fed’s Logan Gives Remarks, Moderates Panel
• 1:30 pm: Fed’s Kashkari Participates in Q&A
• 2:45 pm: Fed’s Bostic on Bloomberg TV

DB’s Jim Reid concludes the overnight wrap

In terms of heartwarming domestic news this morning, regular readers will remember my daughter Maisie suffered from Perthes disease between the ages of 5 and 7, spending months on crutches and then over a year in a wheelchair after a major operation. Her hip ball had disintegrated and there was no guarantee it would regrow or would regrow in the right shape. It could have been a childhood of limping and constant pain. However we were fortunate it did regrow while in the chair and over the last 2 and a half years she’s got stronger and stronger with the only thing we don’t allow being trampolining. Therefore imagine our immense surprise when last week she got picked to represent her school at the long jump in an U9 event with five other schools! I couldn’t have imagined anything less likely three years ago. My wife and I were a bit nervous about letting her do it but in the end she came second. She swims four times a week for her artistic swimming club and I can only think this has done her a world of good in terms of strength. So we were delighted for her, especially given all she went through.

In terms of what the market has been through in recent weeks, I think we could all do with a lie down and there are some hopes of that this week given the scarcity of front line data. However as we know the headlines will keep coming, especially with regards to trade.

It‘s likely that fiscal developments in Washington will take centre stage with the House expected to vote on its reconciliation package this week just as Moody’s removed the US’s last remaining triple-A rating late on Friday night. As our economists discussed last week (see “Tax bill details suggest still-elevated deficits in the near term’), though the specific components of additional tax cuts on top of the TCJA extension differed from what they had previously outlined (see “US outlook: Tariff-struck”), the JCT score of the Ways and Means mark-up was largely in line with our top-line deficit assumptions. Assuming House Republicans are able to resolve their outstanding policy disagreements and vote on the tax package this week, the Senate will then start to mark up the bill, where even more policy disagreements await. One thing stands out though, and that is that at this stage there are no signs of any serious deficit restraint.

On that topic, Moody’s cut the US credit rating on Friday night from Aaa to Aa1 (stable outlook). This is a major symbolic move as Moody’s were the last of the major rating agencies to have the US at the top rating. Moody’s have had them on watch since November 2023 and if there is going to be a change then it tends to happen within 12-18 months so this news shouldn’t have been unexpected. Remember S&P was the first to downgrade the US from AAA back in August 2011 which brought a brief market panic at the time. The S&P 500 fell -6.7% on August 8th (the Monday after the cut) while Treasuries actually rallied 20bps on a flight to quality bid. A slightly different reaction this time given they are “only” playing catch-up on one hand, but with debt sustainability now more of a concern on the other. 10yr USTs spiked +4bps in very late trading on Friday on the news. This morning 10 and 30yr USTs are another +3.8bps and +5.2bps higher, respectively, with the latter now at 5% again and +10bps higher than just before the announcement late on Friday. If we stay at these levels this would be a higher yield than that seen at the worst close after Liberation Day. In fact it’s only just over 10bps below the highest point in 2023 when inflation concerns were still bubbling. Prior to that you’d have to go back to 2007 to see 30yr yields higher than current levels.

S&P 500 (-1.0%) and NASDAQ (-1.27%) futures are also weaker on the news along with the Dollar (-0.26%). Mixed China data isn’t helping the general Asia mood with Retail Sales growth slowing to +5.1% y/y in April, falling short of Bloomberg’s forecast of +5.8% and down from +5.9% in the previous month. Fixed-asset investment for the first four months of this year increased by +4.0%, slightly below the anticipated +4.2%. The real estate sector continues to exert downward pressure on fixed asset investment, with a year-on-year decline of -10.3% as of April. Nevertheless, industrial production has exceeded expectations, growing by +6.1% y/y in April, compared to the expected +5.7%, although this represents a slowdown from the +7.7% increase recorded last month.

In the region, the KOSPI is the most affected equity market, down by -1.23% this morning, while the Nikkei (-0.74%), the Hang Seng (-0.49%), the CSI (-0.38%), and the S&P/ASX 200 (-0.62%) are also lower.

The flash global PMIs for May released on Thursday will be the main data focal point this week given that it should fully cover a period of trade uncertainty. European numbers are expected to edge up with US numbers broadly flat. 

Elsewhere inflation in Canada (tomorrow), the UK (Wednesday – preview here) and Japan (Friday – preview here) will be of note. Other things to watch are the RBA decision tomorrow, where DB expect a 25bps cut (preview here), the account of the April ECB decision, the German Ifo and US jobless claims, all on Thursday. This week’s jobless claims corresponds to payrolls survey week so it will allow us to refine our current +125k forecast for May. The full day-by-day week ahead is at the end as usual but there’s not a lot of high profile releases. There are though plenty of central bank speakers and these are also highlighted in that calendar. Many are speaking at the Atlanta Fed’s annual Financial Markets Conference in Amelia Island, Florida which starts today through to Thursday. Other things to note are the UK-EU summit will be in London today. Then tomorrow, G7 finance ministers and central bankers convene in Canada (through May 22) and the EU’s foreign and defence ministers meet in Brussels.

Recapping last week now and risk markets had another strong run with the S&P 500 up +5.27% as it advanced for all five days to post its second best weekly gain since 2023. The bulk of its gains came last Monday (+3.27%) as the US and China dramatically slashed their reciprocal tariff rates for 90 days. The Mag-7 (+9.30% on the week) led the recovery, with tech stocks also helped by a series of deals coming out of Trump’s Middle East tour. On Friday, Trump announced that the US would be “sending letters out” to 150 countries on its new tariff rates over the next two to three weeks. US equities responded positively to the news, with the S&P 500 up +0.70% on Friday. Although Bessent did explain to NBC over the weekend that those not negotiating in good faith will receive the letter with the rate announced on Liberation Day.

The positive backdrop last week saw the VIX index post a sixth consecutive weekly decline (-4.66pts) to its lowest level since mid-February at 17.24. Other risk assets also saw a strong week, with US HY credit spreads falling -38bps to 205bps. The gains were more moderate in Europe, with the STOXX 600 rising +2.10% (+0.42% Friday), while the DAX rose +1.14% (+0.30% Friday) to a new record high. By contrast, gold lost ground amid the risk-on mood, seeing its biggest weekly decline since November (-3.65%).

In the rates space investors pared back their expectations of Fed rate cuts, with the amount of cuts priced by December falling -16.5bps to 49bps on the week. This marks the first time since February that the market expects less than two Fed rate cuts in 2025 and the move came despite softer than expected US CPI and PPI data on Wednesday and Thursday. By contrast, the latest U. Mich survey data showed 1-year median inflation expectations shooting up to +7.3% (vs +6.5% expected), even as consumer sentiment fell to its second lowest level on record. 10yr Treasury yields rose for a third week running, up +10.0bps (+4.7bps Friday) to 4.48%, while 30yr yields rose +11.0bps to their highest weekly close since January at 4.94%. As discussed above, friday’s sell off in Treasuries was mostly due to a late spike on the Moody’s US downgrade news.

Lastly, European bonds saw more muted moves, with 10yr bund yields up +2.8bps to 2.59% (-3.1bps Friday), but OAT (-0.2bps) and BTP (-1.3bps) yields were marginally lower over the week as sovereign spreads continued to grind lower.