Good morning. Moody’s lowered the US’s credit standing to Aa1 from the highest AAA on Friday. This marks the primary time in historical past the US authorities doesn’t have a triple-A credit standing from any of the large three main score companies. Up to now, 10-year Treasury yields have solely risen 4 foundation factors. Will the calm final at present? Electronic mail us: robert.armstrong@ft.com, aiden.reiter@ft.com and hakyung.kim@ft.com.
US and Chinese language market recoveries
US fairness markets don’t like Trump’s tariffs on China. Chinese language fairness markets, unsurprisingly, don’t like them both. The Shenzhen Shanghai 300 index, the first mainland inventory index, and the Cling Seng index, product of the Hong Kong-listed shares of Chinese language corporations, had been buying and selling flat for the reason that Chinese language market caught its second wind after DeepSeek. That got here to an abrupt finish after “liberation day”:
Each the Chinese language market and the US market revived over April and Might. Whereas each leapt after the US and China downgraded from ludicrously excessive commerce duties to only loopy excessive commerce duties, the US had the stronger efficiency:
Just some weeks in the past, many commentators predicted that China would win in a commerce conflict in opposition to the US: its authorities and residents appeared keen to bear the ache of a protracted stand-off, and traders and markets have been nonetheless coasting off excessive hopes for Chinese language tech. That would nonetheless be true. However a more in-depth take a look at the US and Chinese language fairness markets exhibits that traders might have walked again from that narrative. Earlier than digging in, recall the usual caveats in regards to the Chinese language market: it gyrates partly on fundamentals, but additionally on authorities favouritism; its latest run-up has been partially from hopes of a stimulus that has but to materialise; and international traders barely personal it.
Begin by dividing the market into two intervals: when tariffs have been particularly excessive (from April 1, proper earlier than liberation day, to Might 8), and after they got here down (Might 9, when the market began to get excited in regards to the US-China summit, to at present). Sector efficiency within the first interval is revealing (be aware that we simply take a look at the CSI 300 and the S&P 500, as their sector groupings are comparable):
China was clearly in a bear market. Solely the basic defensives — utilities and shopper staples — and financials have been up, and barely so. Actual property, which isn’t a major sector within the CSI 300 and is actually not a defensive in China, was up, too, however that was extra on account of latest good news for the property market than financial optimism. All else was down, together with information tech, which had powered China’s spring rally.
Healthcare was down in each international locations, as a result of Chinese language well being system’s financial stress and concern about Medicaid cuts within the US. Outdoors of healthcare, nonetheless, solely US industries notably uncovered to tariffs and shifting international developments have been down: mushy oil costs dragged down US vitality shares, and China’s steel restrictions hampered US supplies corporations.
On its floor, this doesn’t make a ton of sense. China and the US hit one another with tariffs of comparable severity, and China appeared to have far more leeway to substitute US items. However the US fairness market benefited from two massive benefits. First, tariffs have been walked again on most different international locations, and it grew to become clear that Trump would stroll them again additional (Taco!). That boosted US investor sentiment, inflicting many to flock again to dangerous, dear shares just like the magnificent 7 — a few of which reported good earnings in April, too.
Second, as we detailed the opposite week, the US financial knowledge has been sturdy, whereas the Chinese language financial system has been flailing. The levers they’ve to answer a disaster could also be weakening additional, too. On the present tempo of spending — which has not included significant stimulus — the federal government is already projected to surpass its deficit targets; it appears much less doubtless that efficient stimulus will come in any respect this yr. And the central authorities is affected by “faltering tax revenues, blunted monetary insurance policies, and constraints over borrowing capability due to financial institution capitalisation pressures”, says George Magnus on the Oxford China Centre.
The US’s outperformance after the tariff pause owes loads to these dynamics, too. The S&P 500 completed the week round 5 per cent up, whereas the CSI 300 ended up by slightly over 1 per cent:
Chinese language healthcare shares beat the S&P 500’s, as did financials, on account of a charge lower and the beginning of “tactical financial stimulus” by the Individuals’s Financial institution of China. However hopes for financial aid from decrease tariffs aren’t as excessive as they’re within the US. And Chinese language information tech shares suffered after middling releases from Alibaba and Tencent.
To the extent that the US-China market divergence displays China’s distinctive financial challenges, it feels justified. However US traders is likely to be slightly too exuberant. Chinese language tariffs, even at 30 per cent, will sting, and US companies should still must take care of 10 per cent tariffs on the remainder of the world. And China might nonetheless again away from a deal, or maintain out for higher phrases from Trump. Although its authorities and financial system want the aid, it continues to have political leverage.
(Reiter)
Shopper sentiment
On Friday, the College of Michigan’s shopper sentiment index dropped but once more. It was the fifth straight month-to-month decline, and confirmed that US shoppers are nonetheless involved in regards to the financial system broadly, and inflation specifically; year-out inflation expectations jumped to their highest degree in over three a long time. The mushy knowledge remains to be dangerous.
Nevertheless it did present that one thing may very well be altering. The most recent month-to-month drop was extra restrained than the falls earlier within the yr. The principle index solely fell 2.7 per cent month-over-month, versus an 8.4 per cent decline in April and an 11.9 per cent decline in March.
It’s not completely clear why. It may very well be that shopper sentiment has been buoyed by the Trump administration’s softening stance on tariffs. Or shoppers might really feel extra optimistic in regards to the financial outlook after a string of first rate inflation readings and the fairness market’s restoration.
Additionally, it’s essential to notice that the Might studying is preliminary, and the survey closed only a day after the US and China introduced the 90-day tariff truce. That means that we might see a turnaround within the remaining Might numbers — although Joanne Hsu on the College of Michigan, who publishes the survey, stated that we must always not count on too massive a change. April’s preliminary sentiment studying got here out simply after Trump put a 90-day pause on “reciprocal” tariffs, however the remaining numbers nonetheless confirmed a giant decline in sentiment, she stated.
One different risk for why sentiment declines are slowing is that Democrats’ pessimism is bottoming out. Sometimes, sentiment drops amongst members of the celebration that’s not in charge of the White Home within the first few months of any new presidency — and it’s notably low amongst Democrats proper now. However the charge of change for Might was not as extreme as April. And, apparently, sentiment fell sooner amongst Republicans: common Republican sentiment was down 6 factors from April, whereas Democratic sentiment solely fell 0.5 factors. If that pattern continues and Trump begins to lose extra help from his base, we think about he’ll proceed to decrease the US’s commerce limitations. Then shoppers will actually have one thing to rejoice.
(Kim)
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