Is Moody's downgrade just the beginning? The deep waters of U.S. debt are coming, who will take the next baton, gold or U.S. stocks? - Influencer Salon 0521

On May 21, Chen Xing, the chief macro analyst at Caitong Securities Research Institute, guest appeared in the "Celebrity Lounge" of Wall Street Insights live broadcast, analyzing the current macroeconomic situation and market hotspots starting from Moody's downgrade of the U.S. credit rating. For the live replay, please click here → Moody's downgrade of the U.S. credit rating, is it all Trump's fault?

The key points organized by the Insights Master Class are as follows:

Core viewpoints:

1. The impact of Moody's downgrade of the U.S. credit rating is limited, with short-term concerns and long-term worries. The short-term shock is limited and the reaction is lagging, with significant market learning effects. The real concern is the medium to long-term evolution of U.S. fiscal and debt issues, which will continue to affect the performance of assets such as the U.S. dollar and U.S. Treasuries.
2. The performance of U.S. stocks and U.S. Treasuries is diverging, stemming from different expectations of "government credit" and "corporate profits." The rise in U.S. stocks reflects optimism about corporate profits under tax reduction policies. The decline in U.S. Treasuries is due to concerns over the continued expansion of government debt—this is a double-edged sword effect of policy.
3. The two main lines of Trumponomics: external isolation + internal deregulation. Externally: The "dual high walls" strategy (anti-immigration + anti-globalization) may weaken the long-term economic vitality of the U.S. Internally: Drawing on Reagan-style deregulation to enhance supply-side efficiency can help suppress inflation and stimulate growth.
4. Trump's governance will enter a difficult period for advancing internal policies, with increased policy risks. Although the tax reduction bill is welcomed by the market, the promotion process is constrained by congressional games and fiscal sustainability. The Federal Reserve's tightening stance will further weaken the marginal effect of fiscal stimulus.
5. U.S. Treasuries present better short-term opportunities than gold, but gold has more allocation value in the medium to long term. The gold bull market is not over yet, but the short-term gains have exhausted expectations, requiring caution. U.S. Treasuries have been oversold, possessing short-term hedging and trading value, especially after interest rate cut expectations become clear.
6. European assets are favored, and the global capital "de-dollarization" trend is strengthening. Investors disappointed with the Federal Reserve's policies are turning to European stocks and other non-U.S. assets. In the context of de-dollarization, European assets will be an important allocation direction, especially in sectors benefiting from structural recovery.
7. The RMB exchange rate remains volatile, and RMB assets have structural revaluation opportunities. The RMB exchange rate is stabilizing due to a weaker dollar and export pressures. Continued internal support policies are expected to lead to a revaluation of RMB assets and a rebound as risk appetite recovers.
8. There is great potential for China-Europe cooperation, and the export structure will further optimize. Europe has substantial demand for consumer electronics, computer equipment, and infrastructure reconstruction. If China and Europe replace part of the U.S.-Europe trade structure, Chinese exports are expected to achieve structural increments.

1. Will Moody's downgrade of the U.S. credit rating have a significant impact on U.S. assets?

There are three background events:

First, Moody's is the last international credit rating agency to downgrade the U.S. credit rating.

Second, S&P was the first to downgrade the U.S. credit rating in 2011, followed by Fitch around 2013.

Third, Moody's downgrade is considered "belated," occurring many years later than other agencies.

There are two short-term impacts:

First, due to the learning effect in the capital market, the market's reaction to the downgrade may be relatively slow.

Second, there will be an impact on U.S. assets in the short term, but it may not be as severe as expected, and the impact may dissipate quickly.

In terms of medium to long-term impacts, the downgrade reflects medium to long-term issues in the U.S. economy, particularly the fiscal issues of the U.S. government and the resulting debt problems. These issues affect the trends of the U.S. dollar, U.S. Treasury bonds, and various U.S. assets. If these problems are not effectively addressed or if there is no visible government response, the trend of de-dollarization may further intensify.

Therefore, in the short term, the impact of the downgrade may dissipate quickly, but the underlying issues in the medium to long term remain unresolved, and their impact on U.S. assets may persist.

2. U.S. stocks continue to rise, while U.S. Treasury bonds fall sharply. What trading logic does this reflect?

This divergence phenomenon seems contradictory, but it actually has its internal logic.

On one hand, the sharp decline in U.S. Treasury prices reflects an increasing market concern about the creditworthiness of the U.S. government. The decline in government credit is mainly reflected in fiscal and debt issues, which directly affect the price trends of U.S. Treasury bonds.

On the other hand, despite concerns about government credit, the market's expectations for corporate operating prospects remain relatively strong—this difference in expectations leads to the divergence in the trends of U.S. stocks and U.S. Treasury bonds.

The second point is the "Big and Beautiful" bill. The core of this bill is the tax reduction policy of the Trump administration, which plans to reduce taxes for U.S. businesses and residents by about $4 trillion over the next ten years. At the same time, the bill plans to cut at least $1.5 trillion in spending and raise the U.S. debt ceiling by $4 trillion to meet government fiscal spending needs.

The tax reduction policy directly promotes corporate profits and enhances market confidence in U.S. stocks. Corporations benefit from the profits relinquished by the government, driving the continuous rise of U.S. stocks.

In terms of the impact on U.S. Treasury bonds, the cost is a further increase in government debt. Moody's pointed out during the downgrade that the U.S. government has not shown efforts to control debt or achieve a balanced budget, but instead continues to raise revenue through borrowing. This behavior of living off borrowed money has led to increased market concerns about the creditworthiness of the U.S. government, resulting in weaker U.S. Treasury prices.

In summary, the divergence in the trends of U.S. stocks and U.S. Treasury bonds mainly stems from the market's differing expectations regarding the creditworthiness of the U.S. government and corporate operating prospects. The Trump administration's tax reduction policy has promoted corporate profits while also leading to a further increase in government debt—this dual impact of the policy has resulted in the rise of U.S. stocks and the decline of U.S. Treasury bonds, reflecting market concerns about the medium to long-term issues in the U.S. economy

3. Based on the in-depth series report "Trump Economics" by the Caijing Macro Chen Xing team, how should investors understand Trump's governance logic over the past 100 days?

We began systematically analyzing Trump's policy logic since the early stages of his candidacy.

Research shows that Trump's governance can be summarized into two main lines—foreign isolationism and domestic deregulation.

1. Foreign Policy. Trump's foreign policy has a distinct isolationist tendency, attempting to isolate the United States from the world through a "double high wall": first, by constructing a "high wall of population movement" through immigration restrictions, and second, by establishing a "high wall of trade" through tariff barriers. This strategy is not historically unprecedented—America has attempted isolationism multiple times, each time accompanied by a weakening dollar and declining economic vitality. If current policies persist, they may weaken the U.S. economic growth potential and undermine its global hegemonic status.

2. Domestic Policy. Trump continues the traditional small government philosophy of the Republican Party, significantly relaxing regulations in finance, energy, technology, and other sectors. This approach draws on the experiences of the Reagan era, aiming to unleash economic vitality by reducing government intervention. Its impacts may manifest in three areas: enhancing corporate efficiency; suppressing medium-term inflationary pressures through increased supply; and providing new momentum for economic growth.

3. Overall, isolationist policies may become a "double-edged sword." In the short term, they may cater to certain voters, but in the long term, they could lead to a weaker dollar and a decline in international standing. The deregulation policies are promising; if effectively implemented, they could boost the economy through supply-side reforms, but caution is needed regarding the structural risks brought about by deregulation.

4. Where will the future policy focus of the Trump administration lie? Will it surprise or shock the market?

First, Trump's policy focus prioritizes foreign policy. In the early stages of his presidency, he mainly implemented foreign policies, such as tariff measures, because these policies fall within the presidential powers and are less constrained. The future policy focus will shift to domestic issues, particularly the promotion of tax reform. Domestic policies face challenges.

Domestic policies require Congressional approval and face the challenge of unifying opinions; it is not solely up to the president. Although Trump intends to push for tax reform, it was initially rejected in a vote by the House Budget Committee. Additionally, some hardliners within the Republican Party wish to include or overturn certain Democratic initiatives in the tax reform, such as cutting healthcare subsidies for low-income citizens and abolishing green energy construction plans, believing Trump's proposal is too moderate. Even within the party, coordinating opinions is not easy, making the rollout of domestic policies potentially fraught with difficulties. Fiscal sustainability issues: While tax policies may benefit corporate and household income improvement, they will bring fiscal pressure, and the key lies in how to balance this with fiscal sustainability.

In terms of market impact, the policies of the president and Congress are relatively unified, but the Federal Reserve currently conflicts with presidential policies. If the Federal Reserve maintains a tightening stance, the effectiveness of the policies may be offset. In the current environment, if the Federal Reserve continues to tighten, the effectiveness of the policies may be significantly reduced, asset volatility may increase, and market trends may become uncertain.

Therefore, balancing the promotion of tax policies and fiscal sustainability is key. If the Federal Reserve maintains tightening, the effectiveness of the policies may be significantly reduced, market volatility may increase, and it will be difficult to form a definitive trend

5. What profound impacts will Trump's policies have on the U.S. economy? Will the Federal Reserve be forced to cut interest rates?

The current U.S. economy itself does not have particularly large problems. Trump's policies are unlikely to cause significant drag on the U.S. economy in the short term. Trump's deregulation policies draw on practices from the Reagan administration, aiming to suppress inflation through regulatory relaxation. During the Reagan era, deregulation lowered the prices of many utilities and services by 30% to 50%, significantly suppressing inflation.

If the U.S. economy is relatively healthy and inflationary pressures are low, then Trump's policies will have a stimulating effect on the economy in the short term.

The effects of the Federal Reserve's past interest rate hikes do not manifest immediately during the rate hike process but gradually become apparent after the hikes stop or even begin to be reversed. This is because the debt adjustments of businesses and households are slow, while asset yield adjustments are quick. The lagging effects of interest rate hikes lead to pressure on the U.S. economy, which only gradually becomes evident after the hikes stop.

Trump has had conflicts with Federal Reserve Chairman Jerome Powell, and ultimately Powell made concessions. It is expected that the Federal Reserve may be forced to cut interest rates this year. If the Federal Reserve is compelled to cut rates, the magnitude of the cuts may be significant, and the pace may be rapid.

Overall, Trump's policies have a stimulating effect on the U.S. economy in the short term, especially through deregulation to suppress inflation, but the long-term effects need further observation; it is expected that the Federal Reserve will ultimately be forced to cut interest rates to alleviate economic pressure, and the magnitude and speed of the cuts may be significant and rapid.

6. In what areas might there be more cooperation opportunities between China and Europe in the future?

First, let's look at the demand in the European market. When analyzing exports and trade, one should not only look at the import and export figures but also focus on the value-added or value chain of trade. From the perspective of trade value-added, Europe's real demand share is comparable to that of the U.S. and China, indicating that the demand pull capacity of the European market should not be underestimated.

There are three possible cooperation opportunities:

1. Consumer electronics and general-purpose computer equipment. China has a large export exposure to Europe in the fields of consumer electronics and general-purpose computer equipment. Benefiting from the recovery of the European economy, these industries are expected to see upward opportunities.

2. Export structure adjustment. There are trade frictions between the U.S. and Europe, and the EU has a high dependence on imports of chemicals and machinery from the U.S. If the EU reduces imports from the U.S., China's machinery and chemical industries may gain more export opportunities.

3. Structural incremental demand. The situation between Ukraine and Russia has led to expectations of reconstruction, creating a demand for infrastructure construction across Europe. The machinery and electronics industries will benefit from Europe's construction needs, bringing structural incremental opportunities.

Overall, Europe's real demand is not lacking. From the perspective of trade value-added, its market pull capacity is comparable to that of the U.S. Possible cooperation opportunities for our country include consumer electronics and general-purpose computer equipment, infrastructure construction, machinery, and the chemical industry.

7. European stocks have performed well, and the market seems to be showing signs of abandoning dollar assets in favor of European assets. Is this situation sustainable?

Since the tariff shock in April, European stock markets have performed strongly, rising for five consecutive weeks. The market has begun to show signs of abandoning dollar assets and embracing European assets, especially in the European stock market The core logic behind this is, first, the trend of de-dollarization. The main logic in the current market is de-dollarization, with investors more inclined to allocate non-dollar assets. Second, asset allocation adjustment. Investors are paying more attention to risk assets in non-U.S. countries, especially the European stock market, rather than traditional U.S. Treasury bonds and other dollar assets.

The key variable is the Federal Reserve's policy. The current policy of the Federal Reserve is relatively unfriendly to the U.S. capital market, with concerns about inflation risks and a pause in interest rate cuts. In this policy environment, investors do not see particularly good investment opportunities, thus turning to non-U.S. markets like Europe.

Overall, the current phenomenon of abandoning dollar assets and embracing European assets may continue, especially the performance of the European stock market. The direction of the Federal Reserve's policy is crucial; if the Fed conveys signals of rate cuts or a dovish stance, the market may experience short-term fluctuations. In the long run, the trend of de-dollarization may still persist, but attention should be paid to the impact of changes in the Federal Reserve's policy on the market.

8. Given the current situation, how will gold prices move in the second half of the year? Is gold investment still a good choice?

First, gold is suitable for medium to long-term allocation and is not very suitable for short-term trading.

Second, based on historical experience, since 1970, gold bull markets have often lasted around ten years. For example, the periods from 1980-1990 and 2000-2012 were significant gold bull markets. The current gold bull market began in 2018 and has not yet run its course in terms of time.

Third, logically speaking, once gold prices reach a certain level, they tend not to fall back, such as at the $1,000 and $2,000 thresholds. In terms of time and price space, there is still room for gold to rise. Historically, gold prices have shown an inverse relationship with the real interest rates of U.S. Treasury bonds, but this framework has failed in the current gold price increase. Quantitative model analysis shows that the influence of U.S. Treasury bond real interest rates on gold prices has weakened, while the impact of central bank gold purchases has increased. The median gold reserve in global central bank foreign exchange reserves is about 15%, while the gold reserve ratio of the People's Bank of China is only about 5%, indicating a significant gap. This suggests that the trend of central bank gold purchases will continue.

Fourth, the current gold price has accumulated many factors, including geopolitical conflicts and expectations of interest rate cuts, leading to price spikes. Recent geopolitical conflicts have shown signs of easing, and expectations for interest rate cuts are being pushed back, which may create short-term pressure on gold prices.

Therefore, in the short term, a cautious attitude towards gold prices is warranted, and the cost-effectiveness of investing in gold is relatively low.

9. U.S. Treasury Bonds vs. Gold, which has greater upside potential?

Gold: Positive in the medium to long term, but in the short term, gold prices are already at a high level, with limited upside potential.

U.S. Treasury Bonds: Not as solid as gold in the medium to long term, but from a short-term trading perspective, there may be greater opportunities in U.S. Treasury bonds.

Currently, U.S. Treasury bonds face selling pressure from the following aspects:

First, the impact of a weakening dollar; the weakening dollar is somewhat related to the selling of U.S. Treasury bonds, but the core issue is the Federal Reserve's policy inclination.

Second, the hawkish tendency of the Federal Reserve's policy; the Fed's current policy is tight, with no expectations for interest rate cuts, making it difficult for U.S. Treasury bond yields to decrease 3. The dilemma of overseas investors: Overseas investors holding U.S. Treasury bonds face exchange rate losses because the interest on U.S. Treasury bonds is denominated in U.S. dollars, which results in losses when converted back to their local currency.

1. Expectations of capital gains: Investors expect to compensate for exchange rate losses through capital gains, but the Federal Reserve's hawkish policy makes it difficult to achieve capital gains on U.S. Treasury bonds.

From a cost-performance perspective, after the price drop of U.S. Treasury bonds, the coupon rate has become relatively high, improving the cost-performance ratio. It is expected that the Federal Reserve may be forced to align with the policies of the Trump administration and adopt interest rate cuts. Once the Federal Reserve cuts interest rates, the price of U.S. Treasury bonds is expected to rise, providing greater upside potential. From a short-term safe-haven perspective, U.S. Treasury bonds may be more attractive than gold. Overall, although gold is more favored in the medium to long term, there are greater short-term trading opportunities in U.S. Treasury bonds at the current moment.

10. In the current context of de-dollarization, how will the RMB exchange rate and RMB assets perform?

Regarding the RMB exchange rate trend,

Currently, the RMB exchange rate will neither be too strong nor too weak, showing an overall oscillating trend. Against the backdrop of Trump’s policies, the U.S. dollar is generally trending weaker. The RMB is pegged to the U.S. dollar, and the weakening of the U.S. dollar alleviates the depreciation pressure on the RMB, so the RMB will not be too weak. If the RMB exchange rate is too strong, it will increase price pressure on exports, bringing operational pressure. Therefore, the RMB will also not be too strong.

Under the dual influence of a weakening U.S. dollar and export pressure, the RMB exchange rate is expected to maintain its current level, showing an oscillating trend.

Regarding the trend of RMB assets,

The China-U.S. tariff issue is developing towards negotiation and easing, and has achieved phased results, reducing the external policy pressure on RMB assets.

Although external tariff issues have eased, domestic support policies are still being continuously introduced, and the intensity has not weakened, jointly supporting RMB assets.

In the context of previous risk aversion, RMB assets face revaluation opportunities. RMB assets not only include high-quality assets but also stable central enterprise dividend-type assets, with a rich variety of asset classes to meet different investor needs.

Considering the internal and external policy environment, the future trend of RMB assets is relatively optimistic, and domestic risk assets are likely to have good benefits.

In summary, under the balance of a weakening U.S. dollar and export pressure, the RMB exchange rate is expected to maintain an oscillating trend, neither too strong nor too weak. As external tariff issues ease and internal support policies continue, with a rich variety of asset classes facing revaluation opportunities, the future trend of RMB assets is relatively optimistic, and risk assets have good benefit opportunities.

The above wonderful content comes from the live column "Celebrity Salon" in the【Jianwen Master Class · Annual Membership】rights.

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