Weekly Review: Markets Pause as Fiscal Risks Resurface

Markets took a breather last week after a strong rally, with the S&P 500 pulling back following nearly a 20% rise since April. Investor sentiment cooled as bond yields climbed and renewed trade tensions re-entered the picture. While most headlines focused on President Trump’s tariff threats against the EU and tech imports, several other developments caught the market’s attention. These included a credit rating downgrade of U.S. debt by Moody’s, a weak auction for 20-year Treasuries, and the House passing a major tax package dubbed the “One Big Beautiful Bill.” The bill cleared a major hurdle in the House but still needs to navigate the Senate, where it’s likely to be reshaped.

The Moody’s downgrade stripped the U.S. of its last triple-A rating, citing a lack of progress in curbing deficits and rising interest costs. While not unexpected, it reignited focus on the growing fiscal burden, especially with legislation on the table that could add nearly $3 trillion to the deficit over the next decade. The bill extends Trump-era tax cuts and proposes new breaks, with most spending cuts only coming later. Bond markets reacted sharply - the 10-year yield rose above 4.5%, and the 30-year briefly topped 5%, levels not seen since 2007. With recession risks easing and fiscal stimulus likely on the way, rate-cut expectations have been scaled back, and fixed income markets globally are adjusting. Meanwhile, U.S. business activity picked up in May, with both services and manufacturing beating expectations, though housing data was mixed and rising costs tied to tariffs remain a concern.

In Europe, business activity contracted in May, with the Eurozone composite PMI falling below the 50 mark. Germany and France both saw output shrink, and the European Commission cut its 2025 growth forecast to 0.9%, citing tariff risks and U.S. policy uncertainty. Encouragingly, inflation is forecast to hit the ECB’s 2% target by mid-2025, providing policymakers with some breathing room. The UK delivered mixed data - higher inflation and strong retail sales contrasted with weak business activity, as the manufacturing sector continued to struggle.

In Asia, Japanese bond yields rose to their highest since 2008 amid stronger inflation and expectations of rate hikes. Core machinery orders surged, pointing to healthy capital spending, but services growth slowed, and manufacturing remained under pressure. In China, industrial production surprised to the upside, showing resilience despite escalating U.S. trade tensions. However, retail sales growth softened and fixed asset investment missed expectations, weighed down by a continued slump in the property sector. The data reinforced calls for targeted fiscal support, with analysts expecting Beijing to roll out stimulus in stages.

Global equity markets reversed recent gains, reflecting the more cautious tone. In the U.S., the Dow fell 2.47%, the S&P 500 dropped 2.61%, and the Nasdaq lost 2.47%. Europe was mixed, with the Euro Stoxx 50 down 1.86%, while the FTSE 100 rose 0.38%. In Asia, Japan’s Nikkei 225 declined 1.57% and the Shanghai Composite lost 0.57%, while Hong Kong’s Hang Seng Index added 0.93%. Meanwhile, gold rallied 4.86% to close at $3,357.52, as investors shifted to safe-haven assets.

Market Moves of the Week:

It was a busy week for South Africa. Finance Minister Enoch Godongwana delivered a revised 2025/26 Budget, shelving the proposed VAT increase while maintaining the government's commitment to fiscal consolidation. To offset weaker revenue, Treasury announced R68 billion in spending cuts and a modest fuel levy hike. Growth expectations were revised down to 1.4% for 2025, lifting the projected debt-to-GDP peak to 77.4%.

President Cyril Ramaphosa’s visit to the White House was marred by a tense exchange with U.S. President Donald Trump, who reignited unfounded claims of white genocide and land seizures in South Africa. Ramaphosa had hoped to steer the discussion toward trade relations - especially given that the U.S. is South Africa’s second-largest trading partner - but Trump dominated the meeting with printed media reports and videos. The South African delegation, which included billionaire Johann Rupert and several well-known local golfers, found itself on the defensive. The encounter underlined the fragile state of diplomatic ties and cast fresh uncertainty over a suspended 30% tariff on South African exports.

On the economic front, April’s CPI rose 2.8% year-on-year. Retail sales growth slowed to 1.5% in March from 4.1% previously. While higher food prices nudged up headline inflation, broader price pressures remain subdued. These figures support the view that inflation is well contained, adding to expectations that the South African Reserve Bank may adopt a more dovish tone in coming meetings.

Looking ahead, markets are focused on next week’s SARB interest rate decision. Although no rate cut is anticipated, the combination of easing inflation, a pause in U.S. tariffs, and improved fiscal signals could lay the groundwork for future easing. Meanwhile, the JSE All Share Index rose 0.98% for the week, driven by a strong 11.86% rebound in resource stocks. Industrials and financials underperformed, while the rand strengthened 1.17% to close at R17.82/USD.

Chart of the Week:

The yield on 30-year U.S. Treasury bonds has risen above 5%, signalling investor anxiety over the country’s worsening fiscal position. Moody’s downgrade of the U.S. sovereign rating last week added to concerns around rising debt and political inaction. As doubts grow over the sustainability of U.S. borrowing, the dollar has come under pressure - falling nearly 1% this week and over 7% year-to-date, its worst annual start since 2005. Source: Bloomberg

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Source: STRATEGIQ Capital, an authorised financial services provider (FSP 46624)