Trade Tension, Technology Sector, and US Credit Rating Stir May

May was marked by ups and downs, including trade tensions, the downgrade of the US credit rating, and surprises in the technology sector. Despite the turmoil, major US stock indices closed higher, but the fixed income market showed signs of concern. In this edition, Marcio Brito, Head Investor at Banco Itaú International, comments on these and other topics that shaped the debate in international markets this month.

Main highlights:

• US-China Trade Truce: In early May, the two countries agreed to a 90-day pause in the tariff war that has been ongoing since April. US tariffs were reduced from 145% to 30% and Chinese tariffs to 10%. The temporary truce brought a brief respite to markets and boosted consumer confidence.
• US-European Union Tensions: Despite the truce with China, the US has threatened to impose tariffs on EU imports, including German cars and iPhones assembled in Ireland, for example. Although the decision was postponed shortly thereafter until July 9, the threat has kept markets on edge as any new developments could cause volatility.
• US Credit Rating Downgrade: Moody's has cut the US credit rating from AAA to AA1, citing rising deficits and a public debt of over $36 trillion. The downgrade signals an increase in fiscal risk, which could have a future impact on interest rates for companies, consumers and even the exchange rate.
• Technology Sector Performance: Despite the turbulent backdrop, the technology sector drove gains in the S&P 500 and Nasdaq indices in May. Nvidia reported robust results and enthusiasm for artificial intelligence remains strong, supported by significant investment from the Middle East.

• Fixed Income in Focus: The yield on 10-year U.S. Treasury bonds rose to 4.46%, suggesting that investors are beginning to hedge against long-term risks, especially with U.S. debt on the radar.

• Fiscal Stimuli in China: The Chinese government announced a new round of fiscal stimulus in May, focusing on tax cuts, liquidity injections and financing for consumption and technological innovation. However, the Chinese economy has yet to show clear signs of recovery, with weak figures and low private sector confidence.
• Outlook for the European Economy: Although growth in Europe remains sluggish, with industry stagnant and consumption weak, inflation appears to be under control. This paves the way for possible interest rate cuts by the European Central Bank, potentially creating a more favorable environment for European stocks and bonds in the coming months.