Economy

This article is an on-site version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning and welcome back to FirstFT Asia. In today’s newsletter:Wall Street’s sudden recoveryUS warns companies globally not to use Huawei AI chipsFT investigates Elon Musk’s Doge The furious rally in US assets sparked by the tariff détente between Washington and Beijing has caught big investors off-guard, colliding with widespread bets against the dollar and Wall Street stocks. Wall Street rebound: The S&P 500 has rallied 4 per cent this week, erasing all of its losses this year, after the US and China agreed to cut tariffs for at least 90 days, signalling an end to the worst of the trade war. The dollar initially rose too, while US government bond prices have dropped as traders exit traditional havens. Investors caught ‘offside’: The rush of money back into stocks has stung large asset managers and other institutional investors, who were cautiously positioned on US assets on fears of an economic slowdown and broader worries over US policymaking. “I think the market got caught quite offside,” said Robert Tipp, head of global bonds at PGIM Fixed Income. “As the climbdowns and deals started to look more plausible — even though there are still a lot of tariffs by modern standards — that has forced a reassessment and a major position squaring.”Too much optimism? In a sign of the dramatic shifts in sentiment, the Nasdaq Composite has surged nearly 30 per cent from a low just weeks ago, after Trump’s April 2 “liberation day” tariff announcement shook markets. But some asset managers warn that this shift towards trade optimism has run too far. “We should remember the policy chaos damage to consumer and business confidence before getting too optimistic,” said Andrew Pease, chief investment strategist at Russell Investments. Read the full story.Here’s what else we’re keeping tabs on today:Economic data: India, Indonesia and South Korea publish April trade figures, while Australia reports employment figures for the month.Russia-Ukraine talks: The two countries are due to hold peace talks in Turkey. Results: Alibaba and Mizuho Financial Group report earnings.Join us for a subscriber-only webinar on May 28 for insights into the most consequential geopolitical rivalry of our time: the US-China showdown. Register now and put your questions to our panel.Five more top stories1. The Trump administration has taken a tougher stance on Chinese technology advances, warning companies around the world that using AI chips made by Huawei could trigger criminal penalties for violating US export controls. The commerce department issued guidance to clarify that Huawei’s Ascend processors were subject to export controls because they almost certainly contained, or were made with, US technology.Chinese manufacturing: Exporters were “shocked and elated” after China and the US agreed a thaw in their trade war.Hong Kong toymaker plans production shift: VTech plans to move all US-bound production away from China and warned that tariffs meant American consumers would “inevitably” end up paying more for toys.2. Qatar has agreed to buy up to 210 aircraft from Boeing in what Trump hailed as the largest order of jets in the history of the American company. The White House said economic deals worth more than $243bn had been agreed with Qatar as Trump toured the oil-rich Gulf in pursuit of headline-grabbing investments. Trump meets new Syrian president: The US president urged Ahmed al-Sharaa to normalise ties with Israel, one day after he announced that the US would lift sanctions on the country. 3. Western carmakers may not have a future in China as local brands take significant market share from foreign carmakers like Volkswagen and Toyota, Stellantis has warned. Asked whether western auto groups would be able to compete in China, Maxime Picat, Stellantis’s chief operating officer for Asia-Pacific, Middle East & Africa, said: “I’m quite an optimistic guy, but not on that one.” 4. Tesla’s board has formed a special committee to explore Elon Musk’s pay, which could lead to the electric-vehicle maker’s chief being offered a fresh package of stock options. People familiar with the matter said major investors had given the board their views on the billionaire’s pay and continued leadership of the company.5. Shares in retail trading platform eToro surged on the company’s Wall Street debut as investor optimism sparked by a de-escalation of trade tensions between China and the US spread to the new listings market. EToro rose as much as 42.8 per cent during intraday trading yesterday, but closed 28.8 per cent higher at $67, valuing it at about $5.5bn.The Big ReadSix months after Trump officially announced the formation of Elon Musk’s cost-cutting vehicle, the so-called Department of Government Efficiency, it has yet to find a fraction of the $2tn of savings promised at a campaign rally last year. Today’s Big Read has found evidence of inflated valuations to boost numbers and contracts that were due to lapse being claimed as new savings. We’re also reading . . . Downfall in Davos: Klaus Schwab, the ousted founder of the World Economic Forum, is fighting for his legacy after a whistleblower alleged he and his family received inappropriate financial benefits.Beijing’s aviation ambitions: State-backed manufacturer Comac doesn’t need to dominate abroad to disrupt the global order, writes June Yoon.‘Golden passports’: Christian Kälin, the man behind the rise of citizenship-by-investment schemes, says a landmark EU court ruling won’t stop the trend.Chart of the dayMoët Hennessy went from generating €1bn in cash in 2019 to burning through €1.5bn last year, according to documents seen by the FT, as a global downturn in sales of alcoholic drinks hit LVMH’s wine and spirits empire hard. But people familiar with its operations say strategic decisions made under the leadership of former CEO Philippe Schaus, who left the group at the start of this year, exacerbated its problems.Take a break from the newsJan Dalley, the FT’s former arts editor, picks her favourite pieces of art in the Sigg collection at Hong Kong’s M+ Museum. ‘Bloodline — Big Family No. 17’ (1998) by Zhang Xiaogang More

Preparations for a post-Brexit “reset” of relations between the UK and the EU were thrown into turmoil on Wednesday after EU member states demanded further concessions from London over fishing rights and youth mobility.With only five days until an EU-UK summit in London, EU diplomats rejected European Commission attempts to bridge gaps between the two sides that have led to increasingly fraught negotiations.A draft EU communiqué setting out the terms of an improved EU-UK relationship will not now be finalised until Sunday, just a day ahead of the summit, after EU member states dug in over the terms of a deal.The bloc wants long-term access to British waters for its fishermen and cheap university fees for its students as the price for lowering the trade barriers that followed the UK’s departure from the EU single market and customs union in 2020.“We are all unhappy with missing progress, especially on youth mobility . . . and how the British demand wide-ranging concessions without offering anything in return,” said one EU diplomat briefed on a meeting of the bloc’s ambassadors on Wednesday. The proposed reset of relations — outlined in the draft EU text seen by the FT — seeks to deepen links in areas including security, energy and trade in agrifood products, but would force the UK to accept some Brussels rules and a role for the European Court of Justice, as well as make some payments to the bloc.Another EU diplomat said the UK had been engaged in “intense lobbying” of the bloc’s governments in recent days to oppose an EU decision to impose a time limit on any deal to cut red tape for British food exporters if the UK did not grant long-term access to its fishing grounds.But the EU ambassadors rejected a proposed compromise to make such an agreement “time-limited and renewable” without specifying a link to fishing rights. “Even landlocked member states are vocally supportive of the commission in pushing for a hard link” between fisheries and a veterinary deal to facilitate exports, a third EU diplomat said. British supermarkets have lobbied hard for a veterinary deal to smooth the flow of food, fish and animals between the UK and EU, but industry executives warned privately that the deal would need to be permanent to deliver lasting cost reductions.The veterinary agreement would also involve “an appropriate financial contribution” by Britain.UK ministers have not denied Conservative party claims that the planned accord with the EU would reverse key elements of Brexit, including an acceptance of the principle of “dynamic alignment” — in effect taking new rules from Brussels.Tory leader Kemi Badenoch has said Starmer is preparing to “trade away our sovereignty behind closed doors” and is reversing the basic principles of Brexit.But Labour officials said Starmer was not interested in fighting the “battles of the past” and wanted to build closer relations with the EU, bringing economic benefits to Britain, cutting prices for goods and building better security ties.London and Brussels have moved closer to an agreement in principle for a “youth mobility scheme”, offering visas to 18-30-year-olds to work, study or travel in each others’ countries, raising the prospect of additional temporary migration to the UK.The proposed scheme would not allow participants a pathway to permanent residency or the right to claim social security benefits, with the final number of available visas capped at a maximum “acceptable for both sides”. EU member states are insisting their students should pay the same £9,535 tuition fees as their UK counterparts when attending British universities — a stipulation that was removed from the draft communiqué spurned by EU ambassadors. “Equal fees for EU students is the aim,” another EU diplomat said. Allies of Starmer insisted EU students will not be charged the same fees as their UK counterparts, given the importance of international fees to the finances of Britain’s university sector. “We can’t afford it,” said one.The draft text also includes a “dispute resolution mechanism with an independent arbitration panel that ensures that the ECJ is the ultimate authority for all questions of EU law”.Britain would be invited “at an early stage” to discuss forthcoming EU rules and would be part of the “decision shaping” process, but would have no vote or veto over proposed changes.A UK government spokesman said the ECJ’s role in a reset deal would be the same as in the Brexit withdrawal agreement, where it would give its opinion on the interpretation of EU law, but an arbitration body would take the ultimate decision in any dispute.The spokesman added: “These are EU internal draft texts. No final agreement has been made . . . We have been clear that we will always act in the national interest to secure the best outcomes for the UK.”The European Commission declined to comment.Additional reporting by Alice Hancock in Brussels More

When Klaus Schwab told trustees of the World Economic Forum last month that he planned to “start the process of stepping down” from the organisation he founded 55 years ago, he reeled off a list of achievements.The WEF’s annual winter meeting of political and business leaders in the Swiss ski resort of Davos had become a “global village” where common challenges could be addressed, making it “essential to avoid war”, he wrote in an email on April 1. Schwab’s own “intellectual, political, economic and social contributions to the world” had been recognised with “international and national distinctions”, while “the small non-for-profit foundation” he had created was now an international body granted special status by Switzerland because of its role in the country. “It is evident,” the 87-year-old said, “that I do not have to strive any more to create a legacy.”Just a few weeks later, Schwab is working furiously to protect his legacy after a barrage of accusations prompted the WEF’s board of trustees to order its second probe into his conduct in less than a year. Instead of an envisaged gradual handover lasting until January 2027, Schwab was forced out as chair at the end of April, and investigators are now picking over his financial relationship with the WEF after a whistleblower alleged he and his family received inappropriate financial benefits. Swiss law firm Homburger will lead the internal investigation. “The process will be carried out thoroughly, diligently, and in a timely manner,” the WEF said. “The Forum does not intend to further comment on this matter prior to the conclusion of the investigation.”But Schwab, who strongly denies all claims against him, is fighting back, arguing that the WEF underpaid him for decades, benefited from unpaid work by his wife and enjoyed the reflected glory of their personal philanthropic donations.Some current and former WEF employees view the unfolding events as an inevitable denouement for an organisation and its leader whose identities were so closely intertwined.“Basically, like many founders he thought the institution was completely inseparable from him,” said one former member of the WEF management board. “He should have left years ago, but he obviously couldn’t. I am sure he’ll fight tooth and nail.”A current senior staff member said Schwab “couldn’t let go — if these scandals hadn’t happened he would still be here”.The anonymous whistleblower allegations came on top of claims last year that Schwab had presided over a toxic workplace culture where female and Black employees suffered discrimination, and that his own remarks had made some women uncomfortable — all of which he denies.Karin Keller-Sutter, president of the Swiss Confederation, left, shakes hands with Hilde Schwab, watched by European Commission President Ursula von der Leyen and Klaus Schwab More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.One of the world’s biggest toymakers, which supplies retailers including Walmart and Target, plans to move all US-bound production away from China and warned that tariffs meant American consumers would “inevitably” end up paying more for toys. Allan Wong, chair and chief executive of Hong Kong-based VTech, said on Wednesday that the toy maker was “aiming to complete the transfer of its production of US-bound products away from China” before the end of next year. VTech, which specialises in educational toys, plans to shift production to its factories in Malaysia, Mexico and Germany, Wong said at a press conference. The toy maker is pressing ahead with plans to re-engineer its supply chain despite a truce between Washington and Beijing, which has resulted in the US cutting tariffs on Chinese goods from 145 per cent down to 30 per cent for 90 days. US President Donald Trump said this month that 80 per cent tariffs on Chinese goods “seems right”. Trade talks are continuing between the two countries. VTech, which also makes baby monitors, smartphones and headsets, said prices of imported goods for American consumers will rise. “Unfortunately [the] tariffs [translate] to higher prices for some of the products going to the US,” Wong said. “[That] will inevitably affect some of the purchasing power of the consumer.” The warnings echo those made this month by Mattel, the toy maker behind Barbie dolls. The US-based company warned prices would rise and said it was accelerating efforts to shift production out of China.By 2027, China will account for less than 10 per cent of Mattel’s US imports, chief executive Ynon Kreiz said last week. This year the company will move 500 product lines out of China, up from 280 last year as it diversifies its supply chain.VTech has been negotiating with US retailers on price increases but decisions have not been made yet. “It [the price increase] will be lower than 30 per cent . . . [But by] how much, we don’t know, it depends on ultimately what the tariffs look like,” Wong added. VTech’s chief executive said that selling into the US was not possible at a 145 per cent tariff, but 30 per cent tariffs meant the situation was “manageable”. Some Chinese exporters are considering leaving the US market if tariffs remain at high levels. Wong said, however, that VTech has no plans to exit the US market.“The US currently is still a major market for us . . . we will not give up the US market,” he said.VTech reported annual revenues of $2.2bn, a 1.5 per cent increase on last year. Profits attributable to shareholders fell 5.9 per cent to $156.8mn due to a rise in operating expenses. The company forecast a decline in revenue for the coming year, as US consumers rein in spending.Additional reporting by Gregory Meyer in New York and Gloria Li in Hong Kong More

The furious rally in US assets sparked by the tariff détente between Washington and Beijing has caught big investors off guard, colliding with widespread bets against the dollar and Wall Street stocks. The S&P 500 has rallied 3.3 per cent this week, erasing all of its losses this year, after the US and China agreed to cut tariffs for at least 90 days, signalling an end to the worst of the trade war. The dollar rose too, while US government bond prices have dropped as traders exit traditional havens. The rush of money back into stocks has stung large asset managers and other institutional investors, who were cautiously positioned on US assets on fears of a dramatic economic slowdown and broader worries over US policymaking. “I think the market got caught quite offside,” said Robert Tipp, head of global bonds at PGIM Fixed Income. “As the climbdowns and deals started to look more plausible — even though there are still a lot of tariffs by modern standards — that has forced a reassessment and a major position squaring.” Broader negative bets, including those by trend-following hedge funds, may have exacerbated the moves higher as traders were squeezed out of their positions, analysts said. A fund manager survey from Bank of America, which was largely completed before the US-China announcement, found respondents had their dimmest view of US stocks in two years.The BofA survey respondents also had the most negative collective view of the dollar since 2006. That was backed up by Commodity Futures Trading Commission data, which showed that asset managers last week had the biggest bullish bets on the euro since September 2024. Charlie McElligott, a strategist at Nomura, added, “essentially, every thematic macro trade of the past few months is going [the] wrong way.” In a sign of the dramatic shifts in sentiment, the Nasdaq Composite has surged nearly 30 per cent from a low just weeks ago, after Trump’s April 2 “liberation day” tariff announcement shook markets. The CFTC data, which covers the seven-day period ended May 6, also showed that asset managers had their largest ever long position in 10-year Treasury futures, a bet that prices would rise and yields would fall. The 10-year yield is particularly sensitive to growth expectations, so the trade suggested that investors were betting on higher chances of a recession later this year. It has jumped to 4.45 per cent from a closing low in early April of about 4 per cent.“There are some institutional investors who had de-risked pretty significantly. And there was loads of cash on the sidelines,” said Gargi Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock. The dramatic recovery in stocks has been accompanied by a fall in market expectations of volatility. The Vix, Wall Street’s “fear gauge”, is back at pre-liberation day levels. Expectations of swings in the euro-dollar exchange rate have fallen to their lowest since March, according to an index provided by derivatives giant CME Group. Deutsche Bank data suggests that retail investors may have benefited from buying the dip, snapping up stocks throughout most of April while professional investors held off. The S&P’s rally over the past month has been driven by buying during regular New York cash trading hours, when amateur investors are most active, the bank said. In contrast, returns during overnight trading, when institutional investors continue to purchase stock futures and derivatives, “have been muted”.Some asset managers warn that this shift towards trade optimism has run too far. “We should remember the policy chaos damage to consumer and business confidence before getting too optimistic,” said Andrew Pease, chief investment strategist at Russell Investments.In particular, investors said the dollar, which gave up Monday’s gains on Tuesday and Wednesday, could weaken as the economic impact of the trade disruption becomes clear. “My guess is that this is a temporary relief for the dollar, and the tariff rates will be high enough to have a stagflationary impact on the US economy, said Athanasios Vamvakidis, head of global G10 FX strategy at Bank of America. “For the dollar to weaken again, we need the US data to weaken — we believe it will.”Dominic Schnider, head of global FX & commodities at UBS’s wealth management arm, said investors “have yet to see how much the damage [from the trade war] is going to be”. More

This article is an on-site version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning and welcome back to FirstFT. Here are today’s highlights:Trump meets Syria’s new president in RiyadhUS warns companies not to use Huawei AI chips FT investigates Elon Musk’s DogeWhich airlines serve the best in-flight champagne? Donald Trump has met Syria’s new president Ahmed al-Sharaa in Riyadh one day after he announced that the US would lift sanctions on the country and consider restoring relations. Here’s what you need to know.Where did the two leaders meet? The US and Syrian leaders met in the the Saudi Arabian capital of Riyadh. The meeting between Donald Trump and Ahmed al-Sharaa was brokered by Saudi’s de facto leader Crown Prince Mohammed bin Salman and Turkish President Recep Tayyip Erdoğan in order to give Syrians a “fresh start”. The meeting follows a day of dealmaking in the Saudi capital when $600bn worth of defence, artificial intelligence and other agreements were signed by the US with the kingdom.Why is Washington softening its stance towards Syria? The meeting follows the decision by the US to lift sanctions on Syria. “We are currently exploring normalising relations with Syria’s new government,” Trump said after the meeting. The decision by Washington to drop sanctions, which was met with celebrations in Damascus, will boost Sharaa as he battles to consolidate his administration’s control over the fragmented nation. The Saudi crown prince said he welcomed Trump’s decision to lift sanctions, adding that it “will help alleviate the suffering of the Syrian people and open a new page towards growth and prosperity”. Here’s what else we’re keeping tabs on today:Nato: The military alliance’s foreign ministers meet in Turkey to discuss Ukraine, ahead of expected Ukraine-Russia peace talks tomorrow.Germany: Chancellor Friedrich Merz delivers his first major policy speech to the lower house of parliament since taking office.Economic data: Brazil’s services sector is likely be scrutinised today, with the release of monthly PMS data. Separately, Argentina’s National Institute of Statistics and Censuses will be releasing the consumer prices data for April. US economy: Federal Reserve governor Christopher Waller, vice-chair Philip Jefferson and San Francisco Fed chair Mary Daly appear at events.Companies: Cisco Systems is expected to post a 10.6% increase in third-quarter revenue.Congress: Robert F. Kennedy Jr will testify before Congress for the first time since taking the role of health secretary, and will face questions over the firing of thousands of health agency employees and a fast-growing measles outbreak.Join us for a subscriber-only webinar on May 28 for insights into the most consequential geopolitical rivalry of our time: the US-China showdown. Register now and put your questions to our panel.Five more top stories1. Exclusive: Tesla’s board has formed a special committee to explore Elon Musk’s pay, which could lead to the electric-vehicle maker’s chief being offered a fresh package of stock options. People familiar with the matter said major investors had given the board their views on the billionaire’s pay and continued leadership of the company.2. President Donald Trump’s administration has taken a tougher stance on Chinese technology advances, warning companies around the world that using artificial intelligence chips made by Huawei could trigger criminal penalties for violating US export controls. The commerce department issued guidance to clarify that Huawei’s Ascend processors were subject to export controls. 3. The US is exploring a potential deployment of Latin American peacekeeping troops to Haiti, according to three people familiar with the situation. A Kenyan-led international force has failed to halt a takeover by criminal gangs of Haiti’s capital Port-au-Prince which threaten to seize the last few neighbourhoods to which the country’s interim government has retreated. Read more on how the deployment would work.4. Moët Hennessy went from generating €1bn in cash in 2019 to burning through €1.5bn last year, according to documents seen by the FT. People familiar with the group behind Dom Pérignon champagne and Hennessy cognac said strategic decisions made under the leadership of former chief executive Philippe Schaus, who left the group at the start of 2025, exacerbated its problems.5. China has criticised a trade deal between the UK and US that could be used to squeeze Chinese products out of British supply chains, complicating London’s efforts to rebuild relations with Beijing. Asked about the deal, Beijing said it was a “basic principle” that agreements between countries should not target other nations.UK-US: Washington is eyeing a multibillion-dollar slice of Britain’s pork, poultry, rice and seafood sectors, as it looks to expand the trade deal.China manufacturing: Exporters were “shocked and elated” after China and the US agreed a thaw in their trade war.US-China: Ports and shipping lines are braced for a demand “whipsaw” as businesses race to stockpile Christmas goods during the 90-day trade war “ceasefire”.News in-depthSix months after Donald Trump officially announced the formation of Elon Musk’s cost-cutting vehicle, the so-called Department of Government Efficiency (Doge), it yet to find a fraction of the $2tn of savings promised at a rally in New York’s Madison Square Garden during the election campaign. Today’s Big Read has found evidence of inflated valuations to boost numbers and contracts that were due to lapse being claimed as new savings. Read the investigation in full.We’re also reading and watching . . . Global trade: We seem unable to turn the surplus in some countries into productive investment elsewhere, writes Martin Wolf.Trump’s “palace-in-the-sky”: Qatar’s offer of free jumbo jet advances the argument that the US is becoming a kleptocracy under this president, argues Edward Luce.Milk is back: The dairy industry’s efforts to woo customers away from plant products are a masterclass in corporate survival tactics, writes Brooke Masters.🎬 $40bn bitcoin bet: Michael Saylor transformed lossmaking Strategy into the world’s largest corporate holder of the cryptocurrency. Can it survive a crash?Chart of the dayUS stocks recovered their losses for the year after yesterday’s lower than expected inflation figures added fuel to a rally sparked by Trump’s deal with China to cut tariffs. “There’s been an instant reversal in the prevailing trends of the last several months,” said one fund manager.Take a break from the newsHTSI drinks columnist Alice Lascelles shares which airlines serve the best champagne — “for those lucky enough to turn left when boarding”.© Getty Images More

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This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. President Donald Trump’s Middle East tour has already been full of surprises. On Monday, he accepted Qatar’s gift of a plane, despite ethics concerns. And yesterday, he announced a big defence and AI pact with Saudi Arabia, and a surprise end to US sanctions on Syria. Three days to go. How many more surprises are in store?Unhedged is thrilled to introduce a new team member, Hakyung Kim. Hakyung, a graduate of NYU Stern, is joining us from CNBC, where she covered markets, after stints at The Wall Street Journal and NPR. She already appears likely to join the list of people Rob has hired who turn out to be smarter than he is. Email us: [email protected], [email protected] and [email protected] inflationThe news was most welcome: headline CPI inflation rose just 2.3 per cent in April from a year before, the lowest since early 2021. But as regular readers will know, that’s not how Unhedged likes to look at it. We like to exclude food and energy and look at the month-to-month change annualised. This is a smoother and more timely reading. And on this basis, inflation picked up a bit this month:The trend of recent months remains in place: a herky-jerky sideways movement at a level just enough above the Fed’s 2 per cent target to be annoying. A move up in housing prices (a notoriously lumpy series) was a key culprit in keeping prices up this month, but it is not the only factor making the “last mile” of core deflation hard to achieve. Non-housing services inflation, a particular concern for the Fed, is only coming down grudgingly.No one cares about this right now, though. What they care about is whether Trump’s “reciprocal” tariffs, announced early in April then reduced by fits and starts, have shown up in higher prices. And the answer is: maybe, a little. Several import-heavy categories had a hottish month. Here, for example, are month-over-month changes in furniture prices:The 1.5 per cent increase between March and April does look a little high. But, again, the data is volatile. It’s hard to say firmly if tariffs were to blame. That’s not to say that there is nothing to see here. Rather, the nothing is the thing to see. If there was a tariff effect, it wasn’t dramatic, and that’s good news. It shows that retailers did not go in for large price increases in anticipation of incoming tariffs. Next month may be different. But we’ll take reassurance where we can find it.What to expect from a US default near missTreasury secretary Scott Bessent has encouraged Congress to reach a deal to raise or suspend the US’s debt limit by mid-July. If that doesn’t happen, the Treasury will need to take extraordinary measures to avoid missing a debt payment by as soon as August. We expect that Congress will reach some solution before the “X-date”; the consequences of failure are simply too great. But as the days tick by, a “near miss” — Congress raising the debt ceiling just days or hours before the Treasury runs out of money — becomes more likely, and a terrible mistake becomes conceivable. How might the market start to act if negotiations drag on as the X-date approaches? Looking at recent notable near misses — 2011, 2013 and 2023 — provides clues.Credit default swaps: Credit default swaps on Treasuries, a direct hedge against the possibility of a US sovereign default, are the most responsive to the US’s budget situation. The cost of a 1-year credit default swap on a Treasury rose substantially in 2011, 2013 and 2023:The CDS price is now around the levels of 2011 and 2013. Yet, the price went way higher in 2023. It’s not clear why, but there are at least three candidate explanations. It could be that the market has become more aware of the risks after experiencing multiple near misses in the 2010s and as conversations about the US deficit have become more urgent. Or it could be because in 2023 the Fed was shrinking its balance sheet (quantitative tightening) rather than expanding it (quantitative easing). Or it could simply be because the US debt was much higher, both in absolute terms and as a percentage of GDP, in 2023 than in 2011 and 2013:All those dynamics are currently at play, to varying degrees. CDS prices could rise quite a bit further from here.Equities: In 2013 and 2023, the market went down slightly before a deal was reached and got a small bump afterward. It is unclear if the looming X-date was the cause, but according to Goldman Sachs and the Bipartisan Policy Center, companies with high exposure to government spending, such as infrastructure and defence groups, noticeably underperformed the market in the run-up. Chart courtesy of the Bipartisan Policy Center:2011 saw a much bigger equity response. In the weeks before and after the X-date — which Congress beat by only two days — the market dropped 17 per cent, the largest correction since the financial crisis just three years earlier:Why things were different in 2011 and why the market continued to fall after the agreement was reached is, again, not perfectly clear. It was the first near miss after the great financial crisis and a US default seemed like more of a real possibility. The US economy was wobbly and the Eurozone was under strain, too. And right after the incident, Standard and Poor’s downgraded the US’s credit rating from AAA to AA+, even though the budget was already signed. That the US came through the mess in one piece may have made equity investors less sensitive when Congress next crept up to the edge. Treasuries: Treasuries show a more durable trend: yields on the absolute shortest duration Treasuries jump, while moves in longer-term Treasuries are muted. From Shai Akabas at the Bipartisan Policy Center: What we have seen clearly in past episodes is that there is an increase in the rate or reduction in the price of securities that are maturing shortly after the projected X date, because investors are concerned about holding securities [that could go unpaid soon] . . . We have not seen a significant movement in longer term rates that can be easily attributed to the debt limit.2023 is a good illustration. One-month yields (the dark blue line below) leapt, the 3-month and 2-year yields crept up, while longer tenors were mostly indifferent:Akabas notes that longer-dated Treasuries might not react in part because default still seems quite unlikely. But that would probably change quickly were the US government to miss a payment.Together, past near misses suggest we might see a big jump in CDS prices and T-bill yields, and downward pressure on the S&P 500 this summer, especially if Trump’s “big beautiful” tax bill hits roadblocks. But note that 2025 is very different from 2011, 2013 and 2023. In all three earlier instances, Republicans had control of at least one chamber of Congress and were battling with a Democratic presidential administration over spending cuts or freezes. Things are harder to read this time. Republicans have control over the House, Senate and the presidency, but there are spending disagreements within the caucus, surprising policy proposals emanating from the president and a Democratic party that is missing in action. The probability of a near miss, or worse, is harder to read.Investors are facing a messier debt and economic picture, too. Debt and debt interest payments are higher than in the past three episodes. The economy is trickier to analyse because of tariff uncertainty. And foreign demand for Treasuries is questionable at the margin.  That markets, particularly equity markets, were generally calm around past near misses suggests broad trust in the US as a creditor and Congress as a responsible actor. But that could be changing. “Institutional concerns about the US government are higher than at any point in the modern era . . . Congress may not be able to control the market’s fear” said Alexander Arnon, director of policy analysis at the Penn Wharton Budget Model. We hope it isn’t so. (Reiter)One good readEveryone’s a winner.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More