USA – Losing last AAA credit rating
Last Friday Moody’s downgraded USA’s credit rating from Aaa to Aa1, aligning itself with S&P and Fitch
- Moody’s explained by saying the main reason are the rising debt levels, persistent fiscal deficits and the ongoing inability of successive administrations to reverse the trend
- Government debt interest costs are set to reach 1 trillion USD this year, up from 263 billion USD in 2017 – federal interest payments will absorb 30% of revenue by 2035 (from 18% in 2024 and 9% in 2021)
- The rating agency still recognizes the US’ economic and financial strengths, but these no longer counterbalance the decline in fiscal metrics
- Given Trump’s tax and spending package, the situation is set to worsen if current administration’s plans move forward
UBS heading for defeat
UBS Group AG is likely to face a setback in its initial attempt to weaken a proposed Swiss law that could require it to hold up to $25 billion in additional capital
- Under the draft legislation being submitted to parliament, the Zurich-based bank would need to fully back the capital of its foreign subsidiaries to 100%, ensuring it can absorb any potential losses
- This proposal comes from the government’s response to the 2023 collapse of Credit Suisse and has drawn criticism from UBS leadership arguing the move would put UBS at a major disadvantage compared to other major global banks
- The tougher capital rules may limit UBS’s ability to return funds to shareholders or pursue M&A. As a result, the bank is exploring various responses, including the possibility of relocating its headquarters outside of Switzerland
Election results around Europe
Busy weekend in various European countries with elections taking place in Romania, Poland and Portugal
- Against odds, Nicosur Dan defeated far right candidate George Simion 54% to 46% in Romania’s presidential election – Romanian assets staged a relief rally on the news with currency and hard currency bonds leading the way
- In Poland, centrist Warsaw mayor and ally of current prime minister Tusk, Rafal Trzaskowski won the first round of the presidential contest against rivals from populist right – will face Karol Nawrocki in a runoff on June 1st
- Portugal saw the ruling center-right coalition win snap election but witnessed the surge in support for the far right party Chega, potentially becoming second largest group in parliament
Traders betting on Euro strength
Traders are confident that the euro’s rally will continue, with hedge funds targeting gains past $1.20
- The euro has risen to a 10-day high near $1.13, driven by a softer dollar and comments from ECB President Lagarde that a stronger euro is an “opportunity“
- The euro’s gains are also fueled by speculation that this week’s G7 meeting will discuss currency policies, which could lead to further dollar weakness
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