Tariff Risk Returns as US Debt Picture Clouds UK Outlook

• Tsy Sec Bessent warns some Lib Day tariffs may return

• Moody’s downgrades US debt, tax cut bill moves forward, 30yr Treasury breaks 5%

• UK and EU achieve ‘breakthrough’ on trade talks

• Diageo revenue growth accelerates

• China data was mixed

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Big picture: Moody’s downgraded America’s credit rating, citing the unsustainability of growing budget deficit and US national debt. Tsy Sec Scott Bessent described the downgrade as a “lagging indicator”, which is about right since the other ratings agencies cut US debt from triple-A years ago. It’s also true that we’ve been talking about this for years, so I’d be cautious about extrapolating a market reaction from this downgrade. Trying to fit the narrative to the price action is something I wouldn’t like to attempt...

However, we can say it underlines concerns around the budget deficit and a sweeping tax cut bill, which passed a key Congressional committee stage on Sunday. And it’s a fact that the 30yr Treasury yield has since broken a key level at 5% and the 10yr has risen above 4.5%, which is clearly linked to worries about a tax bill and ‘erratic’ economic policy...on which note Bessent also said that US tariffs that are on pause for 90 days could be quickly reimposed if countries don’t negotiate in good faith. I think this is going to heighten tariff risks again and perhaps that is why stocks are down today... it’s the US exceptionalism> US repudiation trade.

Do watch the move in US Treasury yields as it will have knock-on for sterling via the gilt market – UK 30yr yields are now knocking on 5.5%...well above anything seen during the Truss episode. This is a major headache for policymakers on both sides.

US stocks ended the week strongly with the S&P 500 +5.3% for the week and the Dow Jones +3.4%, while the Nasdaq composite rallied more than 7% for the week as tech stocks bounced back. Tesla rallied 17% last week, while Nvidia rose 16%.

More pertinently perhaps from a British perspective is that the UK and EU are said to have achieved a breakthrough on trade talks and a deal is pretty much done. This trade deal news seems to be positive for sterling, which spiked to its best against the euro in several weeks on the news, whilst GBPUSD is pushing back up towards the 1.3350 level.

The deal could see UK defence firms participate in an EU defence fund. But any positive read across for stocks seems to be offset entirely by the US tariff/debt stories which has seen investment trusts and stocks with big US exposure hit this morning in London.

China data overnight was mixed. Industrial production rose 6.1% in April, slowing from +7.7% in March but ahead of the +5.5% estimated. China retail sales rose by 5.1%, below the forecast +5.5% and last month’s +5.9%.

Companies

Diageo says it will take a $150 million hit from tariffs but it can mitigate about half that. The drinks maker launched a $500mn cost savings programme and hailed a decent bump up in organic sales. Reported net sales for the third quarter increased by 2.9% to $4.4bn, with organic net sales up 5.9%, with organic volume up 2.8% and positive price/mix of 3.1%. Full year fiscal 2025 guidance for organic net sales and operating profit was reiterated.

Ryanair full-year profit after tax of €1.61 billion, which was down 16% year-on-year but slightly above analyst expectations of €1.6bn Total revenue for the year rose 4% to €13.95bn, above the €13.89bn anticipated by analysts. Over the year the average fare dropped by 7%, which lifted traffic up by 9% year-on-year to a record 200 million passengers.

National Express owner Mobico reported 9% revenue growth and said the sale of its US school bus business remains on track. UK looks weak as turnaround continues.

Finally, Galaxy Digital, which has traded on the Toronto Stock Exchange since 2020, shifted its shares to Nasdaq through a direct listing under the ticker GLXY.

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