The weekend started with Moody’s downgrading the US credit rating, creating a tough atmosphere for financial markets. Reactions to this downgrade have been mixed. Scott Bessent, who had pointed out the US’s fiscal trends before, now downplays the downgrade’s importance. Bessent believes that GDP growth will lower the debt-to-GDP ratio, even though the deficit is expected to exceed 7% of GDP. This shows a lack of concern for deficits among top officials. He also mentioned that Walmart would absorb some of the tariffs, which could affect its profits. Last year, Walmart had global sales of $648.1 billion and earnings of $15.5 billion, giving it a profit margin of just 2.4%. Walmart now faces challenges from tariffs on low-margin products, many made in China. Bessent also announced that Liberation Day tariffs have been reinstated for several countries. Recently, Japan delayed tariff talks until after the July elections, and agreements with other nations have not been finalized. While there are reports of progress in US-EU negotiations, there’s doubt about whether the US can maintain a 10% tariff without triggering retaliation, suggesting that the trade war is only on hold. This article highlights key developments that affect those involved in options and futures markets. The US credit rating downgrade indicates that even the world’s biggest economy can face changing risk assessments, and policy responses may be unconventional. Initial reactions—mixed and uncertain—could mean that markets have become numb to ratings changes. However, the actions of long-term fund managers may reveal a different outlook in the coming weeks. Bessent’s dismissal of the downgrade suggests he is confident that GDP growth will outpace rising debt. This perspective depends on the expectation that monetary policy won’t tighten dramatically and that inflation stays manageable. But with the deficit above 7% of GDP and no political appetite for fiscal tightening, there are doubts about how sustainable this growth really is. We should remember that when costs shift, even slightly, companies with very thin profit margins are the first to feel the strain. Walmart, with only a 2.4% margin on $648 billion in revenue, might have to either cut earnings or raise prices if tariffs are imposed. Either scenario raises inflation expectations and could influence future rate predictions. With tariffs reinstated, it appears we are returning to a protectionist approach rather than moving into a new phase. The pushback or delays from large economies like Japan—waiting until after elections—show that trade negotiation power is unevenly distributed. While there are hints of progress with European partners, the main concern is the US insistence on a minimum tariff level. Setting such a floor unilaterally could lead to friction. Markets may not be fully accounting for the risk of retaliation, especially in low-volatility situations. We are not seeing coordinated policy actions or even synchronized timelines among global economic powers. This inconsistency adds more complexity to derivative pricing, especially for hedging against cross-border risks or sector-specific downturns. Rates and commodities teams should stay alert for spikes in volatility caused by news, as simple calendar spreads might not be effective under sudden changes. While Bessent tries to frame the downgrade and tariff decisions as manageable within a strong growth narrative, it’s important not to overlook the roles of deficit financing and cost pressures. We are witnessing a blend of political timing, electoral strategies, and margin management coming together, which complicates predictions about market volatility. Be mindful that delays, particularly in fiscal or trade matters, do not mean these issues are resolved. As timelines extend, uncertainty can quietly increase.

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