Weekly house view | US loses its AAA status
The week in review
Equity markets rallied last week after the US and China agreed a reduction in tariffs at a meeting in Geneva. Under the agreement, tariffs on Chinese exports to the US will fall from 145% to 30% and those on US exports to China will drop from 125% to 10% for 90 days. The interim agreement marks a recalibration of the US trade stance. The US and China will now negotiate to reach a final deal in the coming three months. The imposition of US restrictions on the use of AI chips made by a leading Chinese tech firm shows trade tensions with China remain. President Trump said the US will unilaterally set tariffs for many trading partners in the coming 2-3 weeks.
Buoyed by the China deal, the S&P5001 rose 5.3% (in USD) on the week. European equities gained 2.4% and China was up 2.2%. Safe heaven assets fell together with a fall in volatility. Gold lost 3.6%. The US 10-year Treasury yield rose to 4.44%. Despite the interim deal, the overall tariff rate in the US remains around 18%, the highest level since 1937. The world’s biggest retailer warned Americans will pay higher prices because of the trade conflict, despite the US-China agreement.
After Friday’s market close, Moody’s removed its AAA rating for US sovereign debt, warning about rising government debt. The Republican party is pursuing a budget bill that could raise US debt by at least USD2.9 tn over the coming 10 years.
Quote of the week
“While we recognise the US’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s said on Friday.
Key data
The University of Michigan’s consumer sentiment survey fell to its second lowest on record, and year-ahead inflation expectations rose to their highest since 1981. US retail sales edged up 0.1% last month. Japan preliminary Q1 GDP shrank an annualized 0.7% quarter-on-quarter. UK Q1 GDP grew 0.7% in Q1, surpassing expectations.