Here we go again with tariffs and US fiscal focus
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All information provided is for educational and entertainment purposes only. All right. Welcome to a new week in global financial markets. Getting off to a very interesting start here after events over the weekend. Ahead of the weekend, we have maybe excess focus on Moody's downgrading the U.S. Treasuries from their AAA rating that was the last of the major bond ratings agencies to do so. Let's get started.

Less important is that, and more important are the reasons behind that downgrade, and specifically...

citing the fiscal trajectory, which has gotten much worse after those that were putting up a fight in stopping the progress of Trump's big tax cut bill from progressing. They caved in and has cleared at least one key committee hurdle. We don't have any law just yet here, but this progress of the bill does just sort of set us up for many more years of very large U.S. deficits. We have U.S. Treasuries

faltering on this and those yields popping up to these critical levels we've been talking about. So again,

U.S. Treasury yields, the U.S. Treasury market cannot afford to have too much pressure on it without some kind of official intervention. I think the question is, of course, when does that intervention come? What form does it take? How large is it? And what is the market reaction to that? Does the intervention set off the sort of the classic paradigm of hooray, QE, equivalent risk on this is great for liquidity, or does it come with the other strings attached?

something that looks like capital controls or what have you.

So many questions, too many for now, but let's get a bit tactical and say that we have this 30-year above 5%. That was a key level. It was tested multiple times this year without closing above that level. There were some marginal highs above there back in 2023, but that's a critical one. Many consider, however, the institutional focus more in the 10-year, and it is only sort of challenging towards the highs of last week, 4.54% as I am sitting here.

You know, is it 4.6%? The other range highs, is it more like four and three quarters? It doesn't really matter. At some point, if the directional move continues, we would, I would say, should expect some kind of fiscal response. And then again, is it piecemeal? Is it slow? Does it look like just the measures we've seen already discussed by the FT, according to sources, that we see the rules on leverage ratios,

for the largest U.S. banks addressed or the exemption of U.S. Treasuries across the board from being used in calculating leverage ratios. Don't know. Just saying that we need to have an eye on that U.S. Treasury market for now. This plus not just this budget bill progressing and causing some pain in the U.S. Treasury market, but we had U.S. Treasury Secretary Scott Besant as well at the weekend in a TV show yesterday.

You know, again, and this was after Trump said some things on Friday about, oh, we're just going to, you know, there are too many nations to talk to. We're just going to put the levels. We'll just tell these countries what the levels are going to be on tariffs in two or three weeks. But Besant sort of, you know, raising the profile of the risks from tariffs once again.

was saying, look, those countries that are unwilling to negotiate, quote unquote, in good faith, whatever that means, could just see us revert to those Liberation Day tariffs. So clearly an upping of the pressure there. And I think the market is, to some degree at least, taking a fright from this. And we have what you could call the combination of these two things, so pressure on the treasury market and especially that tariff news from Besant,

Really flying fully in the face of what we've seen the markets attempting to do, sort of capped off by the Friday close, which is sort of to come full circle from the Liberation Day fears, like we're going to go into just some sort of new norm of not having to worry about this. And we'll get some pro-growth stuff from the Trump administration and things will all turn out hunky-dory. So, yeah.

I think this reaction with U.S. yields higher, the U.S. dollar much lower, is a very interesting one. But let's see if it gets critical. We have to cross some key levels. I've already mentioned the U.S. Treasury yield levels. We need to look at the dollar as well. And 1.1266 sits very prominently as a range level that was broken on the way down and tested last week but did not fail. So 1.1266 on the euro-dollar.

close strongly above that level, I think we're starting to see this sort of US unexceptionalism coming back on board. And while I don't know what will happen with resentment if we finally do see some sort of intervention to stabilize the treasury market, cap long yields, whatever it looks like, I would say that the dollar would come under significant pressure from such measures. At least that's my assumption. I think a fairly safe one.

Dali in is really caught between a rock and a hard place here because while, of course, the U.S. unexceptionalism pressure on U.S. treasuries is negative, those yields going higher is traditionally supportive of Dali in higher. So I think it's just being pulled in two directions. And until we get that

yield move or yield cap or whatever U.S. intervention looks like, Dalian struggles, I think, a little bit to consistently find the downside. Now, in terms of that budget bill and what it actually contains, I don't have a real rich sense of this besides that it's extending the Trump

tax cuts, raising defense spending and trying to cut some things like Medicaid spending for the poorest Americans. But really, you know, it's not it's not about that. It's a massive change from the current run rate. It's just that it's continuing what is already creating these spectacularly large deficits.

And with that in prospect, if you imagine if you put a U.S. recession on top of things, those deficits could get worse. And how much are these tariff revenues going to offset? Certainly the Doge attempts don't seem to have resulted in much, if anything, at all. So, yeah.

Again, the fiscal trajectory is what it is, and it's about how they're going to stop this from creating some kind of existential pressure on U.S. treasuries. As well as, of course, with the new potentially vicious angle on trade, it scares away countries from wanting to hold and allocate their holdings into U.S. treasuries, into U.S. assets in general. That was that sort of U.S. exceptionalism trade going into reverse that we've talked about previously.

So, yeah, I'm going to keep it short today. It's really about how our market is going to find their feet today. We have this interesting – the U.S. market, of course, is down very badly. We're down almost 400 points the last time I looked at the NASDAQ coming into here. That 200-day moving average will be a key focus if this sell-off continues. Europe relatively more stable, again, encouraging the idea that we are seeing some kind of U.S. versus the rest of the world trade here.

And we'll have to see how this develops. But just wanted to put in a short update saying this is the lay of the land. There was a funny article or opinion piece in the FT this weekend talking about the taco trade, taco, T-A-C-O, meaning Trump always chickens out. So an acronym taco for that. Well,

This is the seeing of the anti-taco if what Besson is saying is true. We also have interesting – and I find this very interesting. So Trump also saying, look, when he hears about Walmart, for example, considering raising prices, he's saying, well, Walmart is making billions. Stop blaming the Trump administration for –

for the tariffs. You can just keep your price. You should eat the tariffs was the quote, eat the tariffs rather than raising prices. We're watching and your customers will be watching too is the message. Well, the only way he can enforce that would be with something like price controls or some sort of a penalty mechanism for companies raising prices. I think it's just a very interesting angle on this and it wouldn't rule out

that Trump is of such a populist stripe that this could come back as an issue. I just want to put it out there. I don't know if this is going to result in anything concrete. I just find it interesting. I think it will get a lot of popular backing if companies are one-to-one raising on the tariffs that are imposed on U.S. trading partners. All right, going to keep it very short today. That's a wrap, and we will be back tomorrow with the Saxon Market Call.