Moody's Wake-up Call...
- Marc Bentin
- May 18
- 8 min read
BentinPartner Weekly
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Marc Bentin,
Bentinpartner GmbH
US stocks stormed higher early last week on news that the US and China had agreed to temporarily lower tariffs on each other's products, with the US reducing its tariffs from 145% to 30% and China dropping theirs from 125% to 10%. China also said it would suspend the addition made on April 4 of seven rare earths to its export control list.
It was reported that the notional short covering in US single stocks showed collectively in the top 1% in terms of intensity over the past 5 years with CTA’s flipping to net long equities for the first time since February 27th.
In this context, precious metals corrected for several reasons; US stocks turned green for the year, the dollar recovered slightly but across the board and 30y yield printed a fresh high for the year, making the yield advantage of the dollar vs. Gold presumably harder to resist. These were all valid short- term reasons to tactically trim positions and temporarily take profits on a strong investment theme, but no valid reason to strategically turn its back on Gold, in our view. Of course, with key technical levels breached on the downside, mechanical investors tried the short side as well but they will be skating on very thin ice…
As we opined last week, in particular, bond yields grinding higher (along with the US CDS) reflected a growing inflation as much as a supply/demand risk premium and with the marginal buyer still setting the price, a buyers’ strike of some sort, could send yields anywhere to 5, 7, 8…% without the support of the central bank as buyer of last resort with no limit on how high they could increase if trust was to disappear without the Fed stepping in. There is little question that the US centric economic policy agenda of tariffs is alienating creditors… and whether fast or slow, the logic of diversification away from the dollar is unlikely to dissipate…nor is the case to own gold, we believe.
That said, US stocks, risk assets but also bonds rallied together at the end of the week following an unexpected decline in whole sale prices (Core PPI MoM dropped -0.4% vs. +0.3% expected while the headline YoY PPI rose 2.4% vs. 2.5% expected and 2.7% for the previous month) while industrial production for April also unexpectedly showed a small decline, depicting a softening inflation narrative.
President Putin responded to the European ultimatum that requested a 30-day truce (in exchange for avoiding another train of sanctions) with a “proposal” to continue “peace” negotiation that were interrupted in April 2022 that largely ignored E. Macron’s “ultimatum” for an immediate cease fire. There was some head shaking on how German, French and UK leaders could look so cheerful and vindictive in the train driving them to a place where hundreds of thousands of soldiers died and keep dying. Whether they were under influence or not, it was neither the train of winners…nor of caring politicians, nor of astute diplomats.
Last week’s story played out nicely for the most part, until the very end of Friday’s session when Moody’s dropped a mini-bomb, announcing it was withdrawing the US AAA rating, highlighting deficit risk. With two of the three rating agencies having taken that step already, the late decision of Moody’s should not come as a real surprise. Neither should it have earth shaking consequences, in my view.
Some of the rating agencies (which history has judged severely) also (temporarily) refused to rate France due to political uncertainties. Now that the decision is behind them for the US AAA rating, they may feel more compelled to drop France below its own AA rating. The market knows this and it is not causing a stir…as it is also expected that the ECB to prevent anything bad from happening to the Bund/OAT spread (to ensure continued effective “policy transmission”) as it heads into more interest rate cuts.
With that caveat, Friday’s decision remained a warning that fiscal slippage is very much a going concern for the US (and most of the Western world). Despite all the DOGE efforts, the current fiscal slippage in the US is not abating over the short term.
In his celebratory Monday press conference, President Trump said that “European Union is, in many ways, nastier than China,” and the U.S. holds “all the cards.” It is only confirming my original concern that Europe will be served last and not necessarily with the best treatment. Bundesbank President and member of the ECB Governing Council, commented on the subject on Wednesday with a mercurial tone;
“We are strong countries in Europe. And, so, we should go into such negotiations with the Trump administration as strong partners. There should be a level playing field, and we should make this crystal clear to American colleagues when they would like to have such tariffs – and going into such tariff direction – then I believe there will be more to lose on the American side compared to the European side…. There is not one element that I can see to make the policy a win for the American side And I hope that there’s a learning curve on the American side over the next couple of weeks and the upcoming months. Because if that is not the case, this uncertainty will remain… It’s not good for financial markets. And this example – or maybe the episode that we have on April 2nd, was a perfect example of how things can go really into a very, very complicated day. I will not say it was luck. But we were close to, let me say, a ‘tipping point’ where I believe financial markets after the second of April were really close to very, let me say - ‘disruptive’ is a nice description of what I had in mind after the second of April. It was close to a meltdown – this was my understanding and was my perception. We should be very cautious about all these things. And it’s definitely not time for complacency. But we as Europeans – we are strong economies. We should signal this.”
Since then, stocks rallied back to unchanged on the year, credit spreads dropped sharply. And losses to the USD have been contained. Only bonds remain on edge with Friday’s Moody’s decision erasing two days of bond markets’ gains (so far) but I am not too concerned for the US economy or its markets. Ultimately, the US policy makes sense…for the US, if they can withstand the near-term shock, step back from the idea of cutting taxes, and get some manners back in, which they seem to be doing.
Celebrating the rally of the euro as a sign of strength (as ECB President C. Lagarde did over the week end) is premature and misguided, in my view, as it only further erodes Europe’s competitiveness (which suffers from higher energy prices and regulatory overburden which will be aggravated by upcoming “preferential” US tariffs). What has eroded the stature of the USD in the eyes of the Global South (which owns most of Central Banks’ reserves) has nearly as much, if not more, to do with the weaponization of its currency. By mimicking the US policy in that respect, I am doubtful that much of Chinese, Russian, Saudis or even Indian reserves will be heading towards the (lower yielding) euro at the expense of the dollar. Reserves will dissipate “evaporate” for one part (due to the reduction in trade imbalances) and going into real investments or assets (such as the Belt and Road Initiative…and Gold) and towards other currencies of the Global South, before piling on AA-A rated European government bonds with the purpose of financing Europe’s alternative war economy.
Overnight in Asia…
Over the past week, the S&P500 dropped -0,4% (-3,7% YTD) while the Nasdaq100 dropped -0,2% (-4,5% YTD). The US small cap index gained 0,2% (-9,1% YTD). AAPL sold off by -3,3% (-20,7%).
The Equally Weighed SP500 gained 0,4% (-1,5% YTD), outperforming the S&P500 by 0,8%. The median SP500 YTD return closed the week at -0,8%.
Cboe Volatility Index sold off by -3,4% (26,2% YTD) to 21,9.
The Eurostoxx50 gained 1,0% (9,9%), outperforming the S&P500 by 1,4%.
Diversified EM equities (VWO) dropped -0,4% (5,0%), matching the S&P500.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,5% (-6,0%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,4% (4,7%).
10Y US Treasuries underperformed with yields rising 7bps (-19bps) to 4,38%. 10Y Bunds climbed 3bps (20bps) to 2,56%. 10Y Italian BTPs dropped -3bps (9bps) to 3,61%, outperforming Bunds by -6bps.
US High Yield (HY) Average Spread over Treasuries dropped -9bps (56bps) to 3,43%. US Investment Grade Average OAS dropped -4bps (19bps) to 1,06%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -3bps (2bp) to 0,66%.
Gold rallied 2,6% (26,7%) while Silver rallied 2,2% (13,2%). Major Gold Mines (GDX) rallied 7,0% (48,5%).
Goldman Sachs Commodity Index gained 1,7% (-1,2%). WTI Crude rallied 4,7% (-14,9%).
Overnight in Asia…
S&P future -62 points; Hong Kong -0.5%; Nikkei-0.7%; China -0.4%
The initial response to Moddy’s stripping the US government of its top credit rating is for US stocks to drop along with bonds and the USD (and for Gold to recover slightly).
China’s April retail sales rose by 5.1% yoy (lower than the 5.8% expected and last month 5.9%) but industrial production rose by a higher than expected 6.1% (5.7% expected). Fixed assets investments rose by 4% yoy (slightlyx lower than expected).
Treasury Secretary S. Bessent downplayed concerns over the US’s government debt and the inflationary impact of tariffs, saying the Trump administration is determined to lower federal spending and grow the economy.
President D. Trump on Saturday ripped into Walmart, saying that the retail giant should eat the additional costs created by his tariffs. Walmart warned on Thursday that everything from bananas to children’s car seats could increase in price.
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