The weekend commenced with Moody’s downgrading the US credit rating, setting a challenging tone for financial markets. This downgrade has been met with mixed reactions, especially from Scott Bessent, who previously emphasised the US fiscal trajectory but now dismisses the downgrade’s significance.

Bessent contends that GDP growth will reduce the debt-to-GDP ratio, despite the deficit being projected at over 7% of GDP, showing a disregard for deficit concerns at the top levels. Additionally, Bessent noted that Walmart would absorb some tariffs, a move which could impact corporate profitability. With global sales of $648.1 billion and earnings of $15.5 billion last year, representing a 2.4% profit margin, Walmart faces challenges due to tariffs on low-margin items, many of which are produced in China.

Liberation Day Tariffs Reinstated

Bessent announced the reinstatement of Liberation Day tariffs for multiple countries. Recently, Japan stalled tariff negotiations until post-July elections, while reported deals with other countries remain unfulfilled. Reports hint at US-EU negotiation progress, yet there’s scepticism about the US maintaining a 10% tariff floor without facing retaliation, indicating that the trade war is merely paused.

This article outlines some pivotal developments that ripple beyond surface-level headlines, particularly for those active in options and futures markets. The US credit rating downgrade sends a particular signal: risk assessments of even the world’s largest economy are subject to change, and policy responses are unlikely to follow an orthodox path. The initial reaction—conflicted—might suggest that markets have become desensitised to ratings agencies. However, actions from long-term fund allocators may tell a different story in weeks to come.

Bessent’s dismissal of the downgrade suggests confidence that GDP growth can outpace the mounting debt stock. This view leans heavily on the assumption that monetary policy will not tighten drastically and that inflation remains supportive but not disruptive. Yet, with the deficit holding above 7% of GDP, and fiscal tightening off the table politically, scepticism remains how sustainable that growth story can be.

We ought to note that when cost structures shift, even slightly, firms on razor-thin profit margins feel pressure first. With Walmart running at just 2.4% margin on $648 billion in revenue, any pricing in of tariffs—if not absorbed entirely—may either compress earnings or force price increases downstream. Either side of that equation adds an edge to inflation expectations, and ultimately, to forward rate assumptions.

Return To Protectionist Policies

From the trade side, the reinstated tariffs—picked up again as if from storage—signal a return to protectionist mechanics rather than a new chapter. The pushback or inaction from other large economies, including Japan’s hesitation until after elections, tells us that trade negotiation leverage is far from evenly distributed. While there are reported gains in talks with European counterparts, the core issue lies in the floor the US wants to impose. A bottom tariff level, set unilaterally, invites friction. Markets may not be pricing in the likelihood of retaliation adequately, especially in pockets of low-volatility environments.

We’re not dealing with coordinated policy action, or even shared timelines among the global economic powers. That variation in policy direction introduces further complexity for derivative pricing—particularly where hedging cross-border exposure or sector-specific downside is concerned. Rates and commodities desks should remain alert to headline-driven volatility spikes, where simple calendar spreads may no longer suffice under gapping conditions.

While Bessent has attempted to cast the downgrade and tariff decisions as manageable under a strong growth thesis, it would be short-sighted to ignore the mechanistic role that deficit financing and cost pass-through pressures may increasingly play. We are watching a combination of political timing, electoral strategy, and margin management converge—and that makes predicting volatility smiles more difficult, not less.

Maintain awareness that delay, particularly in fiscal or trade adjustments, does not equal resolution. When timelines stretch, uncertainty creeps in by stealth.

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