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Andrew Gillham of Team Asset Management offers this week’s market review
THE stock market rally fuelled by the White House’s temporary rollback of its Liberation Day tariffs continued last week despite Friday’s announcement by Moody’s that it had downgraded the US’s credit rating. The blue-chip S&P 500 Index added another 2% over the week, capping the strongest six-week rally since the Covid pandemic.
Remarkably, returns on the index are now back into positive territory for the year-to-date, although UK and European investors are still nursing losses of more than 5% on their US investments because of the depreciation of the US dollar.
Moody’s cut the US’s credit rating by one notch from Aaa to Aa1, citing the increase in government debt and associated debt servicing costs, to levels that are significantly higher than similarly rated sovereigns.
The rating agency also warned that if Congress extended the 2017 Tax Cuts and Jobs Act, it would add around $4 trillion to federal debt over the next decade and the annual deficit would widen to almost 9% of GDP by 2035 owing to higher interest payments on debt and lower revenue generation.
In corporate news, shares in Ryanair rose 5% to 23.47 euros on Monday after it revealed that it had seen strong demand for the peak summer travel season. Chief executive Michael O’Leary asserted that “the whole of Europe seems to be travelling” and the airline had benefitted from “a reluctance to go transatlantic at the moment”.
O’Leary added that he was also increasingly confident that Boeing would deliver the remaining 737-8 aircraft ahead of next summer, which should allow Europe’s largest low-cost airline to catch up on missed growth opportunities and carry 300 million passengers a year by 2034.
The chief executive will qualify for a 100-million-euro bonus if the share price remains above 21 euros for at least 28 calendar days.
The share price has held at above that level for 18 consecutive days, although it cannot be vested until 2028, which would give O’Leary a strong incentive to stay with the airline if the target is reached this month.
Rio Tinto announced that it would pay up to $900 million to acquire a 49.99% stake in Chile’s Maricunga lithium project from Codelco, Chile’s state-owned copper company.
In contrast to its rivals, including BHP and Anglo American, Rio has made lithium a central pillar of its growth ambitions. Lithium is a critical mineral and a key ingredient in lithium-ion batteries, used in mobile phones, laptops and electric cars. Although prices have been depressed in recent years by a supply glut, the mining giant remains confident in its long-term prospects.
Shares in Diageo slipped 1% on Monday after it revealed that it was considering substantial disposals and unveiled a $500 million cost-cutting programme in the face of US trade tariffs and falling alcohol consumption. Its share price has nearly halved since it hit an all-time high in early 2022.
The manufacturer of Guinness and Johnnie Walker whisky will look to cut costs in its supply chain, advertising and promotions as it fights concerns that the industry is falling into structural decline.
Rival brewer Asahi is navigating similar challenges and its chief executive, Atsuski Katsuki, believes that streaming and social media are having an even bigger impact on consumption than Gen Z concerns over alcohol’s impact on health. Younger generations are spending less time outside their homes on entertainment and socialising.
In commodities markets, gold continued to pull back from its all-time high of $3,500 per ounce as funds flowed out of safe havens into risk assets. Brent crude held steady at $65 a barrel as the improving demand outlook was offset by the prospect of an increase in supply of 411,000 barrels a day in June from the Opec+ members, including Saudi Arabia and Russia.
