Markets in May were buoyed by a combination of geopolitical developments and resilient economic data, even as Moody’s became the third major credit rating agency to downgrade U.S. sovereign debt, lowering its rating from Aaa to Aa1. Despite the symbolic weight of the downgrade—citing rising deficits and unsustainable fiscal trends—it had minimal impact on financial markets, with both Treasury yields and equities remaining stable. This muted reaction was largely expected, as Moody’s was the last of the major agencies to act, and concerns over the U.S. fiscal trajectory are well understood by investors.
A key driver of market strength was the announcement of a U.S.-UK trade deal, unveiled on the 80th anniversary of Victory Day. The agreement marked the first meaningful sign of renewed constructive dialogue between the U.S. and its trading partners, suggesting the potential for additional deals ahead. The pact significantly expands American market access across sectors such as agriculture, aerospace, and pharmaceuticals, while addressing long-standing tariff and non-tariff barriers. Although the UK represents a smaller share of U.S. trade compared to other partners, investors welcomed the deal as a broader signal of a shift toward more stable and reciprocal trade relationships.
Further supporting market sentiment were the announcements of a temporary tariff truce with China and additional delays in planned tariffs on the European Union, pointing to a general easing of global trade tensions. While policy volatility remains a factor, markets appear to be adapting to the administration’s negotiation style and increasingly pricing in the likelihood of compromise. That said, we anticipate continued volatility heading into the summer, particularly as the early July deadline for the tariff delays approaches.