Risk sentiment remains stable despite the US ratings downgrade

EU mid-market update: Risk sentiment remains stable despite the U.S. ratings downgrade, with attention returning to trade issues; Japanese yields rise sharply after weak 20-year auction.

Notes/observations

- Europe is higher, led by utilities and telecoms, while financial services and chemicals underperform. Follows strength in Asia despite softer US futures. Bond yields are broadly lower: US10Y down to mid 4.4%, paring some of the rise yesterday from Moody’s downgrade.

- Japan’s 20- and 30-year government bond yields surged to multi-decade highs following a weak auction, exposing deep cracks in demand as the Bank of Japan’s outsized role has effectively hollowed out private market participation. With the BoJ now owning half of all JGBs, analysts see their liquidity is drying up and price discovery is failing.

- RBA cut rates by 25bps to 3.85% as expected. AUD and Aussie yields took a second step lower after Gov Bullock added some dovish commentary about council considering 50bps in discussion. Suggests further cuts may come, with July in focus.

- Regading trade, Japan demands full U.S. tariff removal ahead of Friday's bilateral talks. India and the U.S. discuss a multi-phase trade deal. Analysts see U.S. tariffs and fiscal concerns weighing on dollar outlook, noting parallels to early-2000s dollar weakness. UK-EU post-Brexit deal seen as symbolically positive but with limited economic effect.

- Trump’s call with Putin yielded no ceasefire deal; talks between Moscow and Kyiv set to resume.

- Crude is red, but did jump slightly on safe haven flows after Iran Supreme Leader shot down US nuclear talk hopes.

- Google kicks off I/O 2025 conf today with its main keynote live at 13:00 ET; Focus will be on multimodal AI Agents and Android XR smart-glasses.

- On debt and credit markets, analysts note U.S. firms are shifting bond issuance to euro market amid cheaper funding and dovish ECB outlook.

- Asia closed mixed with Hang Seng outperforming +1.5%. EU indices +0.1-1.4%. US futures -0.2% to -0.4%. Gold +0.2%, DXY -0.2%; Commodity: Brent -0.2%, WTI -0.2%; Crypto: BTC +2.2%, ETH +5.5%.

Asia

- RBA cut the Cash Rate Target by 25bps to 3.85% (as expected) to resume rate cuts following a pause under the current easing cycle. Statement noted that policy was becoming somewhat less restrictive. Assessed that this move would make monetary policy somewhat less restrictive. Would do what was needed to achieve policy.

- China PBOC Monthly Loan Prime Rate (LPR) Setting for 1-year and 5-year LPR: Cut the 1-year and 5-year LPR by 10bps to 3.00% and 3.50% respectively

- China NDRC State Planner confirmed to accelerate stabilizing the economy and employment.

- China Commerce Ministry (MOFCOM) issued statement on US adjusting chip export controls; China vowed to take measures if the US insisted on going its own way; The US was undermining the consensus reached in Geneva talks;

- BOJ said to sound out market actors on amount of JGB buying.

- Japan Fin Min Kato confirmed to attend G-7 meeting in Canada, arranging US Treasury Bessent meeting to discuss topics including FX.

- Disappointing Japanese 20-year bond auction with tail at 114bps (widest tail since 1987).

Europe

- SNB President Schlegel noted that SNB tolerated negative inflation rates over short term. Must ensure price stability during uncertainty; Interest rate was main instrument, but could intervene in FX markets when necessary.

- BOE’s Dhingra (dovish dissenter) noted that her vote for 50bps rate cuts was partly to make a statement about the direction of the economy.

- Bank for International Settlements (BIS) said to have warned that growing U.S. financial volatility could spark a sudden scramble for USD.

Americas

- President Trump was expected to attend the House Republican Conference meeting on Tues (May 20th) in the Capitol.

- US House Speaker Johnson stated that was almost there on the tax bill. Confident would get this done.

- US Senate: Crypto Bill clears key procedural hurdle after an impasse.

Trade

- India reportedly discussing a US trade deal structured in three tranches while Japan-US to meet at the ministry level this Friday. Thailand offering to open up multiple sectors as Vietnam started their second round of talks in DC - and Taiwan says talks ‘going smoothly’.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +0.36% at 551.94, FTSE +0.47% at 8,740.48, DAX +0.24% at 23,962.65, CAC-40 +0.15% at 7,895.54, IBEX-35 +1.40% at 14,282.28, FTSE MIB +0.41% at 40,333.00, SMI +0.29% at 12,378.00, S&P 500 Futures -0.31%].

Market Focal Points/Key Themes: European indices opened higher and remained upbeat through the early part of the session; reports of progress on trade deals seen helping support risk appetite; among sectors leading the way higher are utilities and real estate; lagging sectors include materials and consumer discretionary; earnings expected in the upcoming Americas session include Home Depot, Palo Alto Networks.

Equities

- Consumer staples: Salmar [SALM.NO] -6.0% (Q1 results).

- Energy: Equinor [EQNR.NO] +1.5%, Orsted [ORSTED.DK] +14% (US President Trump agrees to lift pause on the Equinor's wind project; Targeting 2027 as the est start date), SFC Energy [F3C.DE] -10.5% (Q1 results below last year, affirms guidance) - Financials: Swiss Life [SLHN.CH] -1.0% (Q1 results)

- Industrials: Schaeffler [SHA.DE] +7.5% (analysts double upgrade), Diploma [DPLM.UK] +15.5% (H1 results).

- Materials: Wienerberger [WIE.AT] -3.0% (Q1 results, beats estimates).

- Telecom: Vodafone [VOD.UK] +1.5% (Prelim FY25 results, below estimates; €500M share buyback).

Speakers

- ECB pre-release of financial stability review noted that risks to euro area financial stability from trade tensions.

- BOE’s Pill (chief economist, hawkish dissenter) noted his vote against interest rate cut was a ‘skip’ within a continuing withdrawal of monetary policy restriction; Underlying disinflation process continued. Quarterly pace of 25bps Bank Rate cuts seen since last summer was too rapid given the inflation outlook.

- Norway Central Bank (Norges) Financial Stability Report noted that the system was considered to be robust. Maintains counter-cyclical capital buffer (CCyB) at 2.5%.

- BOJ briefing material with bond market participants. Some members said JGB market functionality was improving as a trend due to BOJ’s taper. Other participants saw distortion between super-long yields compared to others. Some seek smaller cut to current bond buying plan; other seek larger cuts.

- Japan reportedly considering accepting US tariff reduction and not complete exception.

- China Pres Xi called for stabilization to counter uncertainties; needed to resolve risks in key areas.

- RBA Gov Bullock post rate decision press conference stated that move was a ‘confident 25bps cut’; Board discussed 25bps or 50bps; prepared to take further rates action if required; Price increases had slowed.

- Iran Supreme Leader Khamenei stated that he did think nuclear talks with the US would be successful.

Currencies/fixed income

- USD continued to wobble in the post Moody’s US sovereign downgrade environment.

- Far East saw some yield divergence as Japanese yields moved higher following a dissapopointing 20-year JGB auction. Australia yield fell as RBA cut its Key Rate by 25bps and lower its terminal rate forecast to 3.20% (implying 65bps of more cuts to come).

- EUR/USD at 1.1265 by mid-session.

- USD/JPY at 144.40.

- 10-year German Bund yield at 2.56% and 10-year Gilt yield at 4.62%. 10-year Treasury yield at 4.43%.

Economic data

- (NL) Netherlands May Consumer Confidence: -37 v -37 prior.

- (DE) Germany Apr PPI M/M: -0.6% v -0.3%e; Y/Y: -0.9% v -0.6%e.

- (DK) Denmark May Consumer Confidence: -18.4 v -17.0 prior.

- (DK) Denmark Q1 Preliminary GDP Q/Q: -0.5% v +1.6% prior; Y/Y: 3.6% v 4.2% prior.

- (HU) Hungary Mar Average Gross Wages Y/Y: 8.4% v 8.7%e.

- (CZ) Czech Apr PPI (industrial) M/M: -0.8% v -0.4%e; Y/Y: -1.3% v -1.0%e.

- (TR) Turkey May Consumer Confidence: 84.8 v 83.9 prior.

- (EU) Euro Zone Mar ECB Current Account Balance: €50.9B v €40.6B prior.

- (TW) Taiwan Apr Export Orders Y/Y: 19.8% v 9.5%e.

- (TW) Taiwan Q1 Current Account Balance: $30.2B v $33.8B prior.

- (HK) Hong Kong Apr Unemployment Rate: 3.4% v 3.2%e.

- (PT) Portugal Mar Current Account Balance: -€0.2B v -€0.2B prior.

- (IT) Italy Mar Current Account Balance: €1.6B v €1.6B prior.

- (GR) Greece Mar Current Account Balance: -€3.0B v -€2.5B prior.

- (EU) Euro Zone Mar Construction Output M/M: +0.1% v -1.2% prior; Y/Y: -1.1% v -0.6% prior.

Fixed income issuance

- (UK) DMO opened its book to sell new 5.375% 2056 Gilts via syndicate; guidance seen 1.75-2.25bps to Gilts.

Looking ahead

- (IL) Israel May CPI Forecast: No est v 2.4% prior.

- (NG) Nigeria Central Bank (CBN) Interest Rate Decision: Expected to leave Interest Rates unchanged at 27.50%.

- (MX) Mexico Citi Survey of Economists.

- G7 finance minister and central bank meeting (Canada is hosting).

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:15 (CH) Switzerland to sell 3-month Bills.

- 05:30 (DE) Germany to sell combined €2.0B in 2030 and 2053 bonds.

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-Month Bills.

- 05:30 (ZA) South Africa to sell combined ZAR3.75B in 2037, 2040 and 2048 bonds.

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO).

- 06:00 (PT) Portugal Apr PPI M/M: No est v -1.3% prior; Y/Y: No est v -1.4% prior.

- 06:00 (NL) ECB's Knot (Netherlands) DNB's Financial Stability Overview.

- 06:00 (IT) ECB’s Cipollone (Italy).

- 06:00 (FI) Finland to sell combined €1.5B in 2032 and 2035 RFGB Bonds.

- 06:30 (EU) ESM to sell €1.1B in 6-month Bills.

- 07:30 (IN) India Apr Eight Infrastructure (Key) Industries: No est v 3.8% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:00 (RU) Russia announcement on upcoming OFZ bond issuance (held on Wed).

- 08:30 (US) May Philadelphia Fed Non-Manufacturing Activity: No est v -42.7 prior.

- 08:30 (CA) Canada Apr CPI M/M: -0.2%e v 0.3% prior; Y/Y: 1.6%e v 2.3% prior; CPI Core- Median Y/Y: 2.9%e v 2.9% prior; CPI Core- Trim Y/Y: 2.8%e v 2.8% prior; Consumer Price Index: 164.2e v 163.5 prior.

- 08:55 (US) Weekly Redbook LFL Sales data.

- 09:00 (US) Fed's Bostic gives Opening Remarks.

- 09:00 (US) Fed’s Barkin at conference.

- 09:30 (US) Fed’s Collins at event.

- 10:00 (EU) Euro Zone May Advance Consumer Confidence: -16.0e v -16.7 prior.

- 10:30 (CA) Canada to sell 3-month, 6-month and 12-month bills.

- 11:30 (US) Treasury to sell 6-Week Bills.

- 13:00 (US) Fed’s Musalem.

- 15:00 (AR) Argentina Apr Trade Balance: $1.0Be v $0.3B prior.

- 18:45 (NZ) New Zealand Apr Trade Balance (NZD): No est v 1.0B prior; Exports: No est v 7.6B prior; Imports: No est v 6.6B prior.

- 19:00 (US) Fed's Hammack and member Daly give Keynote, Bostic moderates.

- 19:50 (JP) Japan Apr Trade Balance: ¥215.3Be v ¥559.4B prior (revised from ¥544.1B); Exports Y/Y: 2.5%e v 4.0% prior (revised from 3.9%0; Imports Y/Y: -4.2%e v +1.8% prior (revised from2.0%); Trade Balance Adjusted: -¥181.2Be v -¥233.6B prior.

- 20:00 (KR) South Korea May Exports 1-20 Days Y/Y: No est v -5.2% prior; Imports 1-20 Days Y/Y: No est v -11.8% prior.

- 20:30 (AU) Australia Apr Westpac Leading Index M/M: No est v -0.1% prior.

- 21:10 (KR) Bank of Korea to sell KRW1.0T in 3-year Bonds.

- 23:00 (TH) Thailand to sell THB9.0B in 2050 Bonds.