May eighteenth, two thousand twenty-five (250505-250511)
Moody’s downgrade of the U.S. credit rating caused quite a stir, lowering it from Aaa to Aa1, The reason was concern about the rising total amount of debt and the ability to meet interest payments.
With that, the era of 3A for U.S. credit has come to a definitive end.(Though honestly, among the capital that truly has pricing power, this had already ended in 23; by 11, S&P had moved to Split-Rated AAA, and after Fitch in 23, the terms were already being assessed on an AA+ basis, So it really has little practical significance.）。
We have discussed U.S. debt many times. The expansion of the deficit is a certainty, and accommodative measures will only accelerate as domestic policies take effect in the second half of the year. This timing, before the third quarter, is what we expected.It is also quite a coincidence that, just before the downgrade, Notes had discussed Trump’s “Big Beautiful Bill” and the next focal points for domestic policy. Those who have not read it should remember to do so.
Image: Notes250516 The Big Beautiful Bill, Fiscal Policy and Bond Markets Exceeding Expectations
This downgrade can be summed up in one sentence:Its significance as a signal outweighs its substantive significance, and its timing matters more than the action itself.
1) In institutions and on Wall Street, the view that the deficit will expand is also quite consistent. Put plainly, Moody’s downgrade is merely a fact that everyone already knew—it is not some so-called “contrarian signal”,It is simply a belated confirmation, lagging behind events, of a trend that had already begun.
So, The rating itself is not a reason for these major pools of capital to act or change their actions, with little practical significance, It merely adds another check mark to the list of reasons to hedge U.S. assets, and gives some short-term trades a reason to take profits.
In other words, compared with the S&P and Fitch downgrades at the time, Moody’s move came in a market already alert to fiscal dysfunction and debt risks, so its impact was naturally much milder. For professional investors, it was not even “news”—the action itself brought no new information.
You can see it by looking at the movement of TLT.
2) Why the timing is interesting
On Friday, Notes discussed the Big Beautiful Bill. It failed on its first vote because some interests had not yet been properly balanced, so it had no real significance. Bringing it up now to apply some pressure makes a lot of sense.
3) As a reminder, starting this week, our top priority will be keeping an eye on the U.S. dollar and Treasuries, followed by U.S. stocks and gold, which are linked to the dollar and Treasuries behind sovereign credit.
Readers following our in-depth work should know that we are preparing and adding to our U.S. equity short positions. The market is comparing this downgrade with S&P’s downgrade in 11 (at the time, SP500 was revised down by 20%) (Of course, we are not that optimistic; as we said before, this is not even news.）；
But regardless, this is at least not good news (for longs in U.S. assets)—that much is certain.
At the time, selling stocks was the core trading strategy; just pull up the SPY chart and it becomes very clear..
Chart: SPX fell after both actions (S&P/Fitch)
However, TLT moved very differently...
Chart: TLT’s movement was very different
After S&P first downgraded the U.S. sovereign rating in 2011, TLT instead surged nearly 20% over two months—at the time, global markets were shrouded in uncertainty over the European debt crisis, With risk aversion in the lead, investors still chose U.S. Treasuries as the “last safe haven.”
When Fitch downgraded the U.S. rating in 2023, TLT fell nearly 10% in one month—The essential difference is that in 2023 the market was concerned about “1/a high-interest-rate environment under 2/U.S. fiscal sustainability,” rather than global systemic risk.The downgrade that year, after the quarterly refunding announcement, had already clearly priced in the loss of control over Treasury issuance. It was later the adjustment to the maturity structure of bills by Yellen in 23 11 (the “bill flip”), followed by the Powell Pivot, that saved the bond market.
Overall, the medium-term trend in TLT will depend more on the Federal Reserve’s policy path (1) and Trump’s fiscal progress (2) than on the rating itself...
Keep watching; we will step in at any time.
Cross-Asset Weekly Review (250518)
1) Start tracking TLT, SPX and USDX
We put it at the top of our watchlist.
How should we monitor it?
Some additional context, The U.S. dollar did rise after the downgrade in 23 8, but at the time this was because both the stock and bond markets were hit hard, tightening financial conditions and forcing the market to buy dollars, creating a “passive push higher.”
Chart: TLT and the U.S. Dollar Index
If yields surge again this time and put pressure on the financial system and confidence in the dollar, the dollar could of course strengthen as well… However, more likely, the dollar-hedging activity we have been discussing for several weeks will resume, and may even accelerate.
The dollar’s movement will once again test SPX, so starting today, everyone should keep a close eye on this cross-market chart:
Chart: TLT, the U.S. Dollar Index and SPX
1/ The U.S. Dollar Index has returned to its range, so we are not entering any FX trades.
2/ The U.S. Dollar Index is moving sideways, while the S&P is recovering; they are not confirming each other, so we remain bearish on U.S. equities.
3/ Watching TLT, actually from a purely technical perspective speaking, after several years of declines, the probability of a rebound is extremely high.. this point will feel somewhat out of place, so be sure to keep a close eye on the market.
Chart: From the long-term perspective, it seems a painful rebound may come first...
2) Gold
Chart: 3200 is being contested at the first painful level
The market continues to validate our assessment of the gold topping range and the three key levels.
Image: New readers, remember to catch up on the earlier Notes, from the newest to the oldest, prioritizing the newer ones
To add some clarification, since some people still have not understood, let me put it more clearly:There are two types of correction: consolidation and downward revision; 3200 is the dividing line between consolidation and downward revision. Do not enter during consolidation; after a downward revision is confirmed, entry is possible, because the former is subject to random fluctuations.
Consolidation has a top and a bottom, while a downward revision has no bottom, so use trailing take-profit and stop-loss levels (for specifics, refer to how we traded oil last week).
3）Bitco
As we said last week, In line with our consistency principle, we have already reduced Bit and are waiting for ATH confirmation:
Chart: Four rectangles
“Simply put: 1) positioning reached the top of the range; 2) it also reached a level of strong demand for ATH; 3) combined with the risk warning from gold; 4) talks; 5) as we expected, the date when tariffs turn may not be far off”
—— Weekly Wrap 250511
So far, there has indeed been no movement after reducing the position, and the market has started fluctuating randomly.
Chart: Continue waiting for ATH confirmation
4）EURUSD
Chart: The timing we expected for a break below the lower boundary has arrived
The U.S. Dollar Index has returned to its range; we are staying away from FX.
5）USDJPY
Chart: Likewise, a painful moment for consensus trades; FX, stocks and gold are all one and the same
The U.S. Dollar Index has returned to its range; we are staying away from FX.
6）A quick update: the S&P
Chart: Downside confirmation failed
Downside confirmation failed, and the consistency confirmation also failed, so our stance remains bearish, but we cannot take a large position—only a probe position.
7）Oil
Chart: Still hovering within the expected range
“The market hit our trailing take-profit level on our oil position and stopped us out. The downward revision happened far faster than expected, making the holding period for this position unusually short. But that is normal for oil trading: most of the move in this asset is often priced in directly over a few key days.Overall, our fundamental view is unchanged: we still expect a move lower and will re-enter at a better price.。”
—— Weekly Wrap 250511
After being stopped out, it is still hovering within our expected range.
8）India
Chart: Profits continue to grow
As we said, do not panic over the India-Pakistan conflict. It is important to understand how your counterparty behaves at the close; for the reasoning, see Notes250508 The India-Pakistan Conflict and the Core Trading Groups in Regional Geopolitical Events: One of the Fundamentals of Understanding the Other Side (Whose Money You Make)
Let profitable positions run gradually.
Last week we said you could use shorter timeframes to look for time-based trades or trades at the edges of a rectangle. Did you look? We will not post short-timeframe charts this week; seeing a brief glance here is different from looking them up and reviewing them yourself.
You must look for yourselves. I’m making you do it, so don’t be lazy.
The weekend is over. Wishing everyone reading this a happy life and all the best in the new week!
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Note: All content in this article is for reference only and does not constitute investment advice or serve as a basis for any laws, regulations, or regulatory policies. Investors should not use this information as a basis for decisions or rely on it.