Trade optimism evaporates

The week starts with a jump in US yields and a weaker dollar after Moody’s downgraded the US credit rating from the top Aaa to Aa1, citing concerns about the US’ rapidly rising debt toward the $37 trillion mark and a budget deficit reaching 7% — the highest in peacetime. Moody’s decision is unsurprising, as S&P and Fitch had already downgraded the US below AAA. If Moody’s hadn’t followed suit, it risked undermining its own credibility.

Now, there are some unverified posts suggesting that Trump threatened credit agencies with tariffs — a claim that, even if true, wouldn’t make much sense. The Treasury Secretary, Bessent, downplayed the downgrade and attempted to shift attention to the sharp tariff hikes that may be announced in the next two to three weeks. Negotiations with most nations have proven complicated, and the US administration has started accusing its partners of not negotiating ‘in good faith’ — likely shocked by countries defending their own interests. As such, tariffs could be reimposed before the end of the 90-day pause, potentially helping refill government coffers in the short term. Whether it could help improve appetite for US sovereign papers is yet to be seen... The Trump administration is once again proving that there is no predictability or reliability in its announcements. Promises can be reversed unilaterally at any time. Negotiations are unlikely to go smoothly, given that what the US administration expects from its partners often comes at a significant cost to the rest of the world.

This means that the market optimism seen just a week ago — following an agreement between the US and China to talk while lowering tariffs during a 90-day window — could be derailed at any moment. The realization that such optimism may be premature should trigger a return to safe-haven assets, including gold (which had retreated over the past two weeks), the Swiss franc, and the Japanese yen. The euro could also see inflows, along with European sovereign bonds. The German 10-year bund yield ended last week below 2.60% on increased demand for its AAA-rated debt — offering a stronger alternative to US Treasuries than it did a week ago.

Before looking ahead to this week, it’s important to remember that credit ratings have tangible implications for portfolios. Investors often use their holdings as collateral to leverage investments. The riskier the asset, the less valuable it is as collateral. The lower the collateral value, the higher the return investors demand — which explains why the US 10-year yield is up 1.7% in Asia today and the 30-year yield is up by nearly 2% at the time of writing.

Consequently, higher yields are weighing on sentiment this Monday. US futures are pointing to a negative open, while European futures are also under pressure — though to a lesser extent than their US counterparts. Last week’s Big Tech rally may also lose steam after pushing Nvidia past $135 per share following the announcement of massive deals with Middle Eastern governments.

Trade risks persist. Apple was told that moving production from China to India wouldn’t satisfy Mr. Trump — who wants iPhones manufactured in the US. Meta, Google, and Microsoft, which had been spared from the tariff crossfire so far, could come under pressure if US-EU talks fail before the 90-day pause ends. In that case, Europe may retaliate against US Big Tech.

In Asia, the week begins with losses across major indices. The Nikkei is pressured by a stronger yen, and the CSI is down. China posted a smaller-than-expected slowdown in April industrial production, but retail sales fell more than forecast — dampening hopes that domestic demand might offset weakening global trade. The Hang Seng Index also started on a bearish note, though dip-buying emerged ahead of earnings from Baidu and Xpeng this week — and ahead of CATL’s Hong Kong IPO, the biggest of the year so far. The world’s largest EV battery maker — with clients including Tesla, Ford, BMW, Mercedes, and Volkswagen — is expected to announce its final offer price today and begin trading tomorrow.

On the economic calendar, both China and Australia are expected to cut rates this week to counter the fallout from trade uncertainties. Meanwhile, UK inflation data out Wednesday is expected to show a sharp increase in headline CPI. Flash PMI data on Thursday will offer a sense of field-level sentiment. The US manufacturing PMI is forecast to slip into contraction, according to Bloomberg’s consensus. While soft data could revive Federal Reserve (Fed) cut expectations, whether the Fed can deliver depends on inflation — and with tariffs back on the table, markets may struggle to find confidence in rate-cut bets.