Stocks surged on trade deal optimism but Moody’s downgrade sparks risk-off

• Stocks end on the highs of the day on Friday.
• Then Moody’s CUTS US credit rating.
• This morning it is RISK OFF.
• Bonds down, Yields UP, Gold UP.
• Try the Roast Pork Tenderloin.

Good morning – I am joining Maria on Mornings with Maria – Fox Business from 6 – 9 am this morning.

So, Stocks ended the day and week higher for a number of reasons…..The first was Monday’s news – made public by Scotty on Sunday evening - that we have an MOU (memo of understanding) between the US and China on a trade deal, then the rest of the week was a result of better economic data (Avg Hourly/Weekly earnings, Initial Jobless Claims, Cont. Claims, Capacity Utilization, NFIB Small Business Optimism), softer inflation data m(CPI & PPI).

Now to be fair – we also had some questionable data as well – think weaker Retail Sales, weaker Empire Manufacturing, weaker NAHB Housing Data, weaker Housing Starts and Building Permits and of course we had weaker U of Mich Sentiment Survey – which I don’t think is an issue. Remember – it is an opinion survey – so it depends on who they survey…. So, take it with a grain of salt.

At the end of the week – we also found out that the Eurozone and the US are actively engaged – although not finalized - in negotiations aimed at resolving ongoing trade tensions and establishing a comprehensive trade deal by the end of July. India has offered to trade for zero tariffs and there are many more countries waiting to ‘make a deal’.

And then we got 2+ trillion dollars’ worth of deals coming out of the Saudi/US investment summit, and the meetings in Qatar and the UAE. Trump making history as he announced massive trade deals for airliners, energy, military equipment, semiconductor chips and infrastructure.

Now, The agreements are part of a broader effort to enhance US / Middle East (ME) economic relationships - though the full implications are still being examined with some wondering if those commitments are real - but what is clear is that the ME has long been a strategic region for global trade and the recent action only highlights it growing role in energy, defense, and tech.

Now – what I heard over the weekend – were questions about why we would cozy up to the Mid-East? Well – here are just a couple of things to consider.

Saudi Arabia, Qatar and the UAE are allies of the United States with complex relationships. They all maintain strategic partnerships with the US, rooted in defense, economic, and geopolitical cooperation.

The Saudi relationship was formalized with the 1951 Mutual Defense Assistance Agreement. This alliance gives the Saudi’s U.S. security guarantees in return for stable oil supplies and regional cooperation. Over the last 7 decades, the partnership includes military cooperation, intelligence sharing, and significant arms sales.

Qatar hosts the Al Udeid Air Base, a critical hub for US military operations in the Middle East. The US and Qatar signed a Defense Cooperation Agreement in 1992, renewed in 2013. They are a major non-NATO ally, designated in 2022, and cooperates on counterterrorism and regional stability, despite tensions over Qatar’s ties with Iran and support for certain Islamist movements.

The UAE is a key US partner with a Defense Cooperation Agreement since 1994. They host US troops and support joint military operations in the region. They are part of the US-led Global Coalition Against ISIS and aligns with US interests in countering Iran. The UAE’s participation in the Abraham Accords (2020) and strong economic ties, including trade and investment, further solidify the alliance.

Now by the end of the day on Friday - all the indexes were UP as investors, traders and algo’s celebrated. The Dow gained 332 pts or 0.8%, the S&P up 42 pts or .07%, the Nasdaq up 100 pts or .05%, the Russell added 18 pts or 0.9%, the Transports added 118 pts or 0.8%, the Equal Weighed S&P up 70 pts or 1% while the Mag 7 added 138 pts or 0.5%.

For the Week - the Dow gained 3.4%, the S&P up 5.3%, the Nasdaq up 7.2%, the Russell gained 4.5% while the Mag 7 gained 9.5%.

But then, after the market closed – Moody’s downgrades their US Credit Rating – taking us from Triple A to Aa1- Once again renewing the ‘SELL America’ narrative – and to that I say - of course they did. They could have done it 2 yrs ago or 1 yr ago – but they didn’t. Now, their reason is simple – large fiscal deficits and rising interest costs – which is NOT a Trump phenomenon – they blamed everybody…. “Successive (that means multiple) US Administrations AND Congress” saying that they all failed to address the problem and emphasizing that the ‘current budget proposals’ do nothing to reverse this trend. Moody’s now joins both Fitch and S&P with the lowered rating. Fitch cut the rating in 2023 while S&P slashed it in 2011.

Ok – great. I get it, but I have to ask – where have they been? None of this is new…. The cut – will only make refinancing our debt more expensive at a time when the economy is already under pressure and if foreign countries that buy our debt think we can’t pay it back – then they will sell our debt (and buy GOLD) sending both yields and Gold surging. Now to that point –10 yr bond yields have gone from 1.3% in June of 2021 to 4.5% this morning…. that’s a 296% increase. Gold has gone from $1873 in June 2021 to $3235 this morning.

We have been talking about this ever since Janet Yellen refused to refinance the debt at 30 yr rates that were on average 1.9% in 2021. Today those same rates are kissing 5%. A 175% increase in the cost of financing the debt.

In the end – while the headline is dramatic this morning - I think it’s a non-event in the long term – but expect it to create short term noise and maybe even a bit of chaos.

And overnight - futures headed lower in what appears will be a ‘Risk Off’ day. This morning at 4:30 am Dow futures were down 355 pts, S&P’s down 75, Nasdaq down 339 and the Russell down 32. Asian markets were all lower and European markets are beginning the day lower as well. Gold is up 1.8% or $58 an oz ticking at $3245/oz. Recall that last week I had said that I expected Gold to trade down and test the trendline at $3182 – well, we did that on Wednesday – and now this headline is causing a rush back into gold – taking it higher today.

The dollar is down 0.7% to 100.33 – this after rallying off the low at 98 back on April 21^st to test the trendline at $101.68. The VIX is up 14% at 19.65 again, suggesting weakness, but not panic. We would have to pierce 25.74 to really raise the temperature in the room.

The 10-yr yield is up 5 bps at 4.53% just 5 bps away from the April high of 4.58%. A breakaway from there would put the January high of 4.8% in the line of fire – and that would put more pressure on stocks.

The S&P closed at 5958 – which was the high of the day – which would have meant that we would have tested 6000 this morning – but that is no longer the case. I suspect that if the narrative remains negative and the Moody’s downgrade becomes the topic of the day or week – then stocks will back off to test the trendlines that are converging at 5770, but I would not be surprised if we filled the gap created last week at 5691. The question then is – ‘will it hold?’ If we do that – then expect the algo’s to try and push lower to test the will of the bulls.

Look – let’s not forget – the volatility is NOT over – the move down has been met with a fairly robust move up. But like anything – the pendulum swings both ways – first – it’s too far to the left and then the return takes it too far to the right – and so – we have what we have ongoing volatility.

Eco data this week includes both Manufacturing and Services PMI’s, Existing Home Sales, New Home Sales and Building Permits.

Garlic herb pork tenderloin

Here is a simple yet delicious pork recipe. Prep Time: 10 minutes, Cook Time: 25–30 minutes.

Ingredients

1–1.5 lb. pork tenderloin, 3 cloves garlic, minced, fresh rosemary, fresh thyme, s&p, olive oil, Dijon mustard.

Preheat oven to 400 degrees.

Make a paste: In a small bowl, mix garlic, herbs, salt, pepper, olive oil, Dijon mustard.

Prep the pork: Pat the tenderloin dries with paper towels. Rub the herb-garlic mixture all over it.

Sear in an ovenproof skillet over medium-high heat, sear the tenderloin on all sides until golden brown (about 6–8 minutes total).

Now put the skillet to the oven and roast for 18–20 minutes, or until internal temp reaches 145°F.

Remove from oven, tent with foil, and let rest for 5–10 minutes before slicing.

Serve with Roasted potatoes, Sautéed broccolini, and apple sauce.