Moody Monday Turns Merrier As Calmer Heads Prevail

WHERE WE STAND – I’m happy to report that the world is still spinning, that the sun rose this morning, and that to the best of my knowledge Armageddon hasn’t yet arrived.

You wouldn’t know it, though, given some of yesterday’s price action, and the hysterical rhetoric which surrounded it, however I’m glad to say that calmer heads did indeed prevail as trade progressed.

This all comes back to Moody’s downgrade of the US’ credit rating on Friday night, from AAA, to Aa1. A downgrade, of course, that tells us nothing new about the state of fiscal affairs in the US, nor one that is an entirely new proposition – S&P did so in 2011, Fitch did so in 2023. Frankly, the US is in a unique position where, as the issuer of the global reserve currency, three letters in a report have almost no ‘real world’ implications on the nation’s creditworthiness.

That, primarily, hinges not only the USD remaining the global reserve currency, but also on an independent and credible Federal Reserve, as well as coherent policymaking split between the three branches of government. For now, all three of those conditions remain intact. It also goes without saying that there is practically no chance the US defaulting on its debt obligations, and nobody should be seriously considering that prospect.

What we saw in markets, then, during the early part of yesterday at least, where the ‘sell America’ trade appeared to be back with a vengeance, was a major over-reaction to Moody’s simply catching up to their peers, albeit about a decade late. The downgrade itself has next-to-no implications on either the fiscal or broader macroeconomic backdrops, and certainly shouldn’t change how investors are thinking about markets at large.

Mercifully, and predictably, conditions became considerably more rational as the day progressed, with ‘sell America’ rather rapidly being faded, particularly during the NY afternoon.

Consequently, equities closed as near as makes no difference flat, with both the S&P and Nasdaq 100 bouncing back from intraday declines of well over 1% apiece. You can’t keep a good market down, and so yesterday proves, with dip buyers out in force once more. I remain bullish here, with spoos breaking 6,000 still firmly on the cards, which in turn would set us up for fresh highs. The passing of peak tariff uncertainty has driven the leg higher thus far, though the baton may now be passed onto fresh FOMO-induced longs, coupled with solid incoming data, and earnings, in order to push us through the round number.

Meanwhile, Treasuries endured a choppy session, most notably at the long-end, where the benchmark 30-year yield briefly rose north of 5%, to its highest level since November 2023, though losses were also pared here as the day progressed. Despite that, the bear steepening does seem set to continue amid ongoing fiscal jitters, especially as the ‘One Big, Beautiful Bill’ continues to make its way through Congress.

Though the steepening might have further to run, I still see the 30-year trading 4.50% before 5.50%, given that a policy pivot from the Trump Admin seems almost certain before that latter level. For those who’d missed it until now, including me, the new acronym doing the rounds is TACO – Trump Always Chickens Out.

Speaking of chickening out, dollar bears did exactly that yesterday, refusing to take the DXY below 100, the EUR back above 1.13, or cable north of 1.34. Those three levels, as well as 144.50 in USDJPY, seem like relatively firm ‘lines in the sand’ for now, and I’d be happy to buy the dip in the greenback, leaning against those regions.

LOOK AHEAD – A rather empty data docket today, in keeping with the broader theme of the week, at least until we get to the dump of PMI surveys on Thursday.

Of those events on the schedule, Canadian CPI is seen falling to 1.6% YoY in April, a chunky drop from the 2.3% prior, which could cement the case for a 25bp BoC cut early next month, an outcome to which markets currently assign around a 2-in-3 chance. We also get the latest read on eurozone consumer confidence later which, predictably, will remain deep in negative territory, with the index having never registered a print above zero. I wonder what the French is for ‘Victor Meldrew’?

Though the data calendar is barren, a handful of central bank speakers are due to make remarks, including five from the FOMC, as well as BoE Chief Economist Pill, speaking ahead of tomorrow’s CPI data.

Lastly, the earnings slate sees notable reports from the likes of Home Depot, key for the consumer outlook, plus Pony AI. If there was ever a company in need of a rebrand, that’s it right there, though ‘pony’ does aptly describe my view on quite a lot of supposed technological advancements these days.