European Midday Briefing : Markets Set for Moody Monday

MARKET WRAPS

Stocks:

European indexes fell and markets were set for a moody Monday after Moody's downgraded U.S. sovereign debt last week.

"This is a major symbolic move as Moody's were the last of the major rating agencies to have the U.S. at the top rating," Deutsche Bank said, adding that there wasn't any serious deficit restraint in Congress.

London Capital Group said the downgrade was likely to re-inject volatility into what had become a relatively sleepy May market after the chaos of April.

On Sunday, Treasury Secretary Scott Bessent dismissed the downgrade , saying Moody's was a lagging indicator. He also warned that reciprocal tariffs that have been suspended for 90 days could be reimposed if countries don't negotiate in good faith.

The downgrade has broad implications for the U.S. economic outlook , including that the Federal Reserve would be compelled to keep rates higher for longer, according to the Bank of Singapore.

Stocks to Watch

Berenberg raised its 2030 revenue estimate for Rheinmetall by 8% to 34 billion euros, adding that its order intake this year could surprise positively.

Rising house prices will help U.K. housebuilders as it implied that market sentiment was positive and improving, RBC Capital Markets said.

U.S. Markets:

Stock futures pointed to a lower open at the start of the week which willl see retailers, including Home Depot, Target and Lowe's, in the spotlight.

Investors will look for clues on their pricing plans after Walmart warned that tariffs will force it to raise some prices.

Meanwhile, housing data toward the end of the week will give the latest read on what has been a difficult spring selling season so far.

Forex:

The dollar fell after the U.S. credit rating downgrade.

"We believe that the market impact should be limited, but the downgrade serves as further evidence of the dire U.S. fiscal outlook and the lack of political willingness in Washington to address it," Danske Bank said.

Sterling rose on reports that the U.K. and EU reached a new trade deal ahead of a summit in London.

The U.K. and EU have reportedly reached a breakthrough over fishing rights and checks on food and other agricultural products.

Closer U.K.-EU alignment was sterling positive, ING said, adding that it expected any surprise progress to send the euro below 0.8400 pounds and sterling to rise to as high as $1.3400.

Bonds:

The 30-year Treasury yield rose above the key 5% level, in what KBC called a knee-jerk jump.

Eurozone 10-year-government-bond yields edged higher, tracking U.S. peers.

Moody's Ratings' decision added to the risks of Treasury curve steepening , Commerzbank said.

"While Moody's is catching up with other rating agencies, the downgrade serves as a reminder of the mounting fiscal challenges."

UBS said that significant selling of Treasurys was unlikely.

Yields could rise by 10-15 basis points in the short term, as they did after the 2023 Fitch downgrade, but the downgrade was unlikely to trigger significant selling or changes in collateral haircuts.

Most investment mandates don't require AAA ratings for Treasurys, and central banks value the Treasury market for its exceptionally deep liquidity, UBS says.

Goldman Sachs raised its forecast for 10-year

The U.S. budget bill wasn't expected to result in a larger-than-expected increase in coupon issuance , and the risk of an immediate bearish Treasury reaction was low, Citi said.

Energy:

Oil prices slipped, as market watchers focused on talks to end the war in Ukraine as Moody's downgrade added to concerns over the U.S. economic outlook and its potential impact on oil demand.

Meanwhile, fresh data from China--the world's top crude importer--showed signs of an economic slowdown in April.

Metals:

Gold prices climbed, supported by a softer dollar and Bessent's latest tariff warnings.

The market optimism seen just a week ago could be derailed at any moment, Swissquote Bank said, adding that the realization that such optimism may have been premature should trigger a return to safe-haven assets.

Copper

Copper prices edged higher, supported by a fourth straight weekly decline in inventories and a softer dollar.

"Base metals started the week on the front foot, gaining moderate momentum and breaking through near-term resistance levels that had previously capped upside moves," Sucden Financial said.

"This occurred in the absence of a strong fundamental or a macroeconomic driver, suggesting that the speculative sentiment towards base metals remains constructive overall."

ANZ warned there could be lower copper demand , of about 5%-10%, if global GDP growth falls below 3%.

Due to the red metal's widespread use across the economy, the metal is sensitive to turning points in the growth cycle, it said.

EMEA HEADLINES

Diageo Sticks With Guidance Despite Tariff Hit

Diageo expects U.S. trade tariffs to result in an unmitigated $150 million hit on its profit and reiterated its guidance for the year as the ripple effects from global trade wars cast a cloud on the U.K. booze giant's efforts to turn around its performance.

The company behind Johnnie Walker whisky, Guinness beer and Smirnoff vodka on Monday said this impact is included in its guidance for fiscal 2025 and fiscal 2026. It added that around half of the hit on its operating profit will be offset by current and future mitigating actions such as increasing prices, managing inventory, reallocating investments and optimizing its supply chain.

Ryanair Posts Earnings Decline as Costs Rise, Fares Fall

Ryanair reported a decline in fiscal-year earnings that was in line with analysts' expectations, as costs rose and average fares fell.

The Irish budget airline said it achieved 1.61 billion euros ($1.80 billion) in net profit for the year to the end of March compared with 1.92 billion euros a year prior, on revenue that grew 4% to 13.95 billion euros.

GSK's Blood-Cancer Treatment Combinations Approved in Japan

GSK said combinations of its blood-cancer treatment, Blenrep, have been approved by Japan's Ministry of Health, and that it expects more approvals through the year.

The U.K. pharma company said Monday that the combinations were approved for the treatment of adults with relapsed or refractory multiple myeloma, and that this was the second major approval for the Blenrep combinations.

GLOBAL NEWS

China's Economy Feels the Sting From Trade War

SINGAPORE-China's economy showed signs of slowing in April as trade tensions with the U.S. soared, underlining the risks high tariffs posed before they were sharply scaled back by Washington and Beijing.

China's economy is set for a short-term boost in the coming months as American importers race to take advantage of lower tariffs on Chinese goods during a 90-day truce agreed by the U.S. and China earlier this month.

U.S. Allies Are Still Waiting for Tariff Relief Even After Speedy China Truce

The U.S. hammered out a trade truce with its foremost geopolitical rival in record time. Reaching agreement with longtime allies is proving more of a slog.

The U.S. drew up a list of 18 key trading partners to focus on in negotiations following President Trump's April 2 tariff blitz, when he slapped "reciprocal" tariffs on almost all U.S. imports.

Israel Says It Will Allow Food Into Gaza for the First Time in Months

Israel will allow the resumption of limited aid deliveries to the Gaza Strip, ending a nearly three-month blockade that has depleted humanitarian supplies in the enclave as the military expands its operations there.

The office of Prime Minister Benjamin Netanyahu announced Sunday that Israel will allow "a basic quantity of food to be brought in" to avoid a starvation crisis, an outcome it said would risk endangering its military campaign to defeat the militant group Hamas. The decision passed without a vote in the security cabinet, according to an Israeli official.

Trump Sounds Upbeat on Ukraine Cease-Fire as Russia Unleashes Drone Barrage

When President Trump holds a phone call with Vladimir Putin on Monday, he will be facing a Kremlin leader pursuing twin goals: slow-walking peace talks and simultaneously portraying himself as a peace-loving president who could be a valuable trade partner of the U.S.

Russia has shown no sign of letting up in its assault on Ukraine. Moscow launched one of the largest aerial barrages of the war overnight into Sunday, deploying 273 drones across Ukraine. The attacks killed at least one person and injured three in Kyiv, including a 4-year-old.

Pro-European Candidate Defeats Far-Right Politician in Romania

The mayor of Romania's capital of Bucharest won the country's presidential election, placing a staunch pro-European politician in power and capping months of political instability.

Nicusor Dan, a centrist, claimed victory in Sunday's election over a far-right candidate, George Simion, who had praised President Trump and promised to "Make Romania Great Again." With nearly all of the ballots counted, preliminary results showed Dan had gotten about 54% of the vote, while Simion trailed with nearly 46%.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

05-19-25 0523ET