Moody's US downgrade weighs on US asset sentiment with bond yields surging

EU mid-market update: Moody's US downgrade weighs on US asset sentiment with bond yields surging; UK and EU ironing out post-Brexit deal; Emerging Europe undergoes 'Super Sunday' of elections.

Notes/observations

- European equities open lower, following weaker US futures after Moody’s downgraded US sovereign credit to Aa1 late Friday, citing rising debt and likely deficit expansion if Trump-era tax cuts are extended. This has driven higher long-term US yields and the widest term premium since 2014. US 10-year Treasury up ~10bps to 4.54%. 30-year hit 5.01%. Despite the downgrade, UBS expects limited selling due to Treasuries’ liquidity and central bank demand.

- US risk appetite dampened further by Treasury Secretary Bessent’s warning that reciprocal tariffs will return if trade partners fail to negotiate sincerely before a 90-day pause expires.

- House Budget Committee narrowly approved Trump’s reconciliation package 17-16 (with Reps. Roy, Norman, Clyde and Brecheen voting “present” after opposing it on Friday), setting up a full-House vote this week even as those four hardliners continue to push for FMAP changes that moderates have rejected.

- UK and EU struck a post-Brexit deal, resolving last issues around fishing rights, with a signing expected today. But UK opposition parties vow to overturn it if they gain power. Details emerging.

- Trump to speak with Putin around 10:00 ET in an effort to revive Ukraine peace talks.

- Over the weekend, Europe’s “Super Sunday” elections shaped Romania, Poland, and Portugal. Romania: Pro-EU Nicu?or Dan won the presidential runoff against far-right George Simion, countering Russian interference concerns. Poland: Warsaw mayor Rafal Trzaskowski led the presidential first round, advancing to a June 1 runoff against conservative Karol Nawrocki. Portugal: Centre-right Democratic Alliance won the snap election but faces coalition challenges as far-right Chega gains ground.

- At Computex in Taipei, NVIDIA CEO Jensen Huang announced partnerships with Marvell and MediaTek for purpose-built chips and Qualcomm for CPUs, unveiled the next-generation GB300 AI system due Q3 2025, confirmed DGX Spark is in full production and shipping in weeks, opened NVIDIA AI servers to third-party chips, and is bolstering its custom chip push by adding NVLink to its tech portfolio for external use.

- Asia closed lower with NZX50 underperforming -1.2%. EU indices -0.1% to -1.7%. US futures -0.9% to -1.7%. Gold +1.3%, DXY -0.8%; Commodity: Brent -0.5%, WTI -0.5%; Crypto: BTC -0.6%, ETH -4.1.

Asia

- China Apr New Home Sales M/M: -0.12% v -0.08% prior; Used Home Sales M/M: -0.41% v -0.23% prior.

- China Apr Industrial Production Y/Y: 6.1% v 5.7%e.

- China Apr Retail Sales Y/Y: 5.1% v 6.0%e.

- China Apr YTD Fixed Urban Assets Y/Y: 4.0% v 4.3%e.

- China Apr YTD Property Investment Y/Y: -10.3% v -10.0%e.

- China Apr Surveyed Jobless Rate: 5.1% v 5.2%e.

- BOJ Dep Gov Uchida reiterated stance that BOJ would raise rate if economic outlook was realized.

Global conflict/tensions

- Russia said to have launched its biggest drone attack targeting several regions including Kyiv; The barrage came just a day before a scheduled call between Trump and Russian President Putin.

- Israel said to be expanding a new ground offensive in Gaza after days of air strikes.

Europe

- UK May Rightmove House Price Index M/M: 0.6% v 1.4% prior; Y/Y: 1.2% v 1.3% prior.

- ECB's Schnabel (Germany) reiterated stance that ECB could leave rates broadly at the level they were at now and was confident that could also maintain price stability in this way.

- ECB's Wunsch (Belgium) stated that ECB might have to cut interest rates below 2%; Did not see the case for 50bps cut in near future.

- ECB chief Lagarde: Euro currency recent rise against the USD attributed President Trump's erratic policies.

- Portugal PM Montenegro Center Right party won snap election (as expected), to take at least 89 seats out of 230.

Americas

- Moody’s cut the United States sovereign rating from AAA to Aa1 and revised the outlook from negative to stable.

- Treasury Sec Bessent stated that Moody’s was a lagging indicator.

- US Mar TIC Flow data saw UK overtake China in March as second-largest foreign holder of US Treasury securities at $779.3B.

- House Panel said to have advanced Pres Trump’s tax cut Bill after GOP hardliners dropped their opposition; could see vote on Bill’s passage this week.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.59% at 546.04, FTSE -0.51% at 8,639.96, DAX -0.15% at 23,712.87, CAC-40 -0.58% at 7,841.13, IBEX-35 -0.06% at 14,040.00, FTSE MIB -1.72% at 39,959.00, SMI -0.07% at 12,300.10, S&P 500 Futures -1.30%].

Market focal points/key themes: European indices opened generally lower and remained under pressure through the early part of the session; lack of news on the trade front allowing concerns over rising yields seen weighing on risk appetite; among better performing sectors are utilities and health care; sectors trending lower include consumer discretionary and financials; Prosus confirms offer for Just Eat Takeaway; reportedly Air France and Lufthansa halt Air Europea deal; no major earnings expected in the upcoming US session.

Equities

- Consumer discretionary: Ryanair [RYA.IE] +4.5% (FY24/25 results, notes too early to provide guidance for this year, has no visibility into the second half of fiscal 2026; Approves follow-on €750M share buyback; summer bookings update), LVMH [MC.FR] -1.0% (China retail sales data), Diageo [DGE.UK] -0.5% (Q3 trading update, affirms guidance), Just Eat Takeaway [JET.UK] +0.5% (Prosus confirms launching offer to acquire Just Eat Takeaway.com at €20.30/shr), Air France-KLM [AF.FR] +1.0% (reportedly Air France and Lufthansa halt Air Europa deal talks - press.

- Energy: Aker BP [AKERBP.NO] -1.5% (analyst downgrade).

- Financials: Euronext [ENX.FR] -2.5% (analyst downgrade).

- Technology: Kainos [KNOS.UK] +1.5% (FY results and launches £30M share buyback).

Speakers

- Iran Foreign Ministry spokesperson stated that the country's enrichment ability was absolutely non-negotiable.

Currencies/fixed income

- USD was on soft footing in the aftermath of Moody’s sovereign downgrade of the United States. The move of the AAA cut pushed US Treasury yields higher and steepened the curve. 30-year Treasury yield above 5.00% (highest since Nov 2023). Dealers noted that threats to Treasury’s' safe-haven status underscored views that the greenback had peaked in value. Markets concerned that large US deficits and inflation would likely compel the Fed to keep rates higher for longer.

- EUR/USD at 1.1264 by mid-session.

- USD/JPY at 144.83.

- 10-year German Bund yield at 2.64% and 10-year Gilt yield at 4.71%. 10-year Treasury yield at 4.54%.

Economic data

- (AT) Austria Apr Final CPI M/M: 0.2% v 0.2% prelim; Y/Y: 3.1% v 3.1% prelim.

- (CH) Swiss weekly Total Sight Deposits (CHF): 443.2B v 453.2B prior; Domestic Sight Deposits: 434.8B v 444.8B prior.

- (ES) Spain Mar Trade Balance: -€5.5B v -€3.4B prior.

- (EU) Euro Zone Apr Final CPI Y/Y: 2.2%e v 2.2% advance; CPI Core Y/Y: 2.7%e v 2.7% advance; CPI M/M: 0.6%e v 0.6% advance.

- (CY) Cyprus Apr CPI Harmonized M/M: 0.7% v 0.5% prior; Y/Y: 1.4% v 2.1% prior.

Fixed income issuance

- EFSF opened its book to sell EUR-denominated 7-year bonds via syndicate; guidance seen +36bps to mid-swaps.

- (SK) Slovakia Debt Agency (Ardal) sold total €606.8M in 2028, 2031, 2033 and 2035 Bonds.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (EE) ECB’s Muller (Estonia).

- 05:30 (DE) Germany to sell combined €5.0B in 3-month and 9-month BuBills.

- 05:30 (NL) Netherlands to sell €1.5-3.5B combined in 3-month and 6-month bills.

- 05:30 (EU) European Union to sell combined €6.0B in 2028, 2031 and 2034 NGEU bonds.

- 05:30 (ZA) South Africa announces details of upcoming I/L bond sale (held on Fridays).

- 06:00 (IL) Israel Apr Unemployment Rate: No est v 2.9% prior.

- 06:00 (IL) Israel to sell combined ILS2.85B in 2027, 2029, 2031, 2033, 2034 and 2042 bonds.

- 6:00 (RO) Romania to sell 6.3% Apr 2028 bonds.

- 06:00 (NO) Norway announcement on upcoming bond issuance (held on Wed).

- 07:25 (BR) Brazil Central Bank Weekly Economists Survey.

- 07:30 (CL) Chile Q1 Current Account Balance: No est v -$1.8B prior.

- 08:00 (BR) Brazil Mar Economic Activity Index (Monthly GDP) M/M: 0.3%e v 0.4% prior; Y/Y: 2.7%e v 4.1% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:00 (IN) India announces details of upcoming bond sale (held on Fridays).

- 08:00 (ES) Spain Debt Agency (Tesoro) size announcement on upcoming issuance.

- 08:30 (CL) Chile Central Bank Traders Survey.

- 08:30 (CL) Chile Q1 GDP Q/Q: 0.5%e v 0.4% prior; Y/Y: 2.0%e v 4.0% prior.

- 08:30 (US) Fed's Bostic gives Opening Remarks.

- 08:45 (US) Fed's Jefferson gives Keynote, Bostic Moderates.

- 09:00 (FR) France Debt Agency (AFT) to sell €5.8-7.4B in 3-month, 6-month and 12-month bills (4 tranches).

- 10:00 (US) Apr Leading Index: -0.8%e v -0.7% prior.

- 10:00 (US) President Trump holds call with Russia President Putin.

- 11:00 (CO) Colombia Mar Trade Balance: -$0.8Be v -$1.2B prior; Total Imports: $5.5Be v $5.3B prior.

- 11:30 (US) Treasury to sell 13-Week and 26-Week Bills.

- 12:30 (CH) SNB's Schlegel in Lucerne.

- 13:15 (US) Fed's Logan moderates Panel at Atlanta Fed Conference.

- 13:30 (US) Fed’s Kashkari.

- 16:00 (US) Weekly Crop Progress Report.

- 17:30 (AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index: No est v 88.3 prior.

- 21:00 (CN) China PBOC Monthly Loan Prime Rate (LPR) Setting for 1-year and 5-year LPR: Expected to cut the 1-year and 5-year LPR by 10bps to 3.00% and 3.50% respectively.

- 23:00 (KR) South Korea Q1 Household Credit (KRW): No est v 1,927.3T prior.

- 23:00 (TH) Thailand Central Bank to sell THB60B in 3-month bills.

- 23:35 (JP) Japan to sell 20-year JGB Bonds.