US credit rating downgrade sparks pessimism while Starmer the dealmaker courts EU leaders
Susannah Streeter, head of money and markets, Hargreaves Lansdown: ‘’Like a long weekend hangover, a headache of worry is seeping into sentiment today. The FTSE 100 has opened lower, as investors mull over the downgrading of the US sovereign credit rating on Friday. Moody’s stripped the US of its triple-A rating, citing the growing US fiscal deficit, and the higher borrowing costs the administration will be forced to pay. Given the pledge by Trump to cut taxes, it’s feared the situation could deteriorate further. More of a sombre mood is expected on Wall Street when trading opens later, with futures indicating falls of around 1% for the S&P 500 and 1.3% for the Nasdaq. The implications of Trump’s erratic policymaking are causing caution to creep back in, dampening down the enthusiasm of recent weeks. US Treasury yields have risen as investors sold off US bonds, with the yield on 30-year US debt hitting 5%, the highest level since April, amid the Liberation Day turmoil. A more risk-off environment is emerging again, with gold climbing higher after its losses of recent weeks, as investors look again for shelter for some of their money. The dollar has not regained its safe-haven allure, instead it’s fallen back against a basket of currencies, as US economic risks loom.
How adept Keir Starmer is at the art of the deal will become apparent later, as changes to the Brexit agreement are set to be announced. As new creaks emerge in confidence in the US, European leaders are gathering in London for the EU summit amid expectations for the first UK wide deal with our closest neighbours since Brexit. Keir Starmer and ministers are on a charm offensive to unlock better growth prospects for Britain. At the heart of the deal is a new UK-EU security pact, which could open European funding pools to British based military contractors. Changes to sanitary and veterinary rules to remove some border checks on food and drink are expected to help boost UK exports. Reciprocal working visas for young people to move around more freely between the EU and the UK, and even a fast-track lane for British passport holders at borders is mooted.
The summit comes after the UK jumped the queue with the US, in sealing a trade deal. Although the government would have had an eye on keeping European allies sweet while sorting terms with the US, talks will have still been delicate. It is crucial that the UK pulls as many levers as possible to boost its growth prospects. Output is expected to slow dramatically this year, and although the US trade deal is welcome it still means the UK is in a worse position than it was just a few months ago. The 10% tariffs will broadly stay in place, with relief for just a few pockets of the economy – so striking new agreements with Europe is even more important than ever. This is a point rammed home by the Governor of the Bank of England in recent weeks and echoed by the JP Morgan boss Jamie Dimon this weekend.
Data from China has underlined that the trading environment worldwide is set to be more fragile. Retail sales in the world’s second largest economy slowed down by more than expected in April, as wariness about the outlook descended on households. Consumers were already cautious, but the tariff implications stirred up more uncertainty. Big ticket items like cars saw sharp declines, falling from 5.5% to 0.7% while clothing and shoes sales growth dropped off from 3.6% to 2.2%. It’s a sign it’s still going to be a tough market to operate in for British luxury brands. Burberry has opened down 2.6% as investors spy ongoing weakness ahead.
Although industrial output growth in China didn’t fall by as much as expected, it still slowed last month from 7.6% to 6.1%. It’s a more resilient showing than forecast, but still won’t negate concerns about the longer-term impact on China as
the trade wars rumble on, despite the 90-day truce. Crude prices have dropped back, with a barrel of Brent Crude trading around $65 a barrel. The US credit rating downgrade is also pressuring crude prices, as the spotlight is shone again on the slowdown expected in the US.
Ryanair’s update indicates that the airline will be flying into calmer skies this year, with consumers more willing to withstand hikes to air fares. Although the company reported a 16% drop in annual profits, it’s more bullish for this year, highlighting that demand is robust across Europe. Travellers are brushing off economic uncertainty and appear determined to ring-fence available budgets to spend on trips abroad. The company says it sees strong summer demand in each of the 37 countries it operates in, with summer bookings 1% ahead of last year. But the company held off from providing more specific guidance given the unpredictable nature of geopolitics and trading relationships around the world.’’