Investors face fresh volatility as US loses AAA

Good morning. Here's what happened overnight and what you need to know today.

---

1.

Credit ripples: Investors will face fresh volatility on Monday as financial markets reopen following Moody’s decision to strip the US government of its last triple-A credit rating. The downgrade to Aa1, announced Friday US time, cited “large fiscal deficits and rising interest costs” and a lack of “material” deficit reduction in current fiscal proposals. It follows similar actions by S&P in 2011 and Fitch in 2023. The move comes as Republicans push a sweeping tax-and-spending bill expected to add between US$3 trillion to $5 trillion to the US$36.2 trillion national debt. Moody’s projects debt to reach 134% of GDP by 2035, with interest payments absorbing 30% of revenue. The bill failed a key procedural vote on Friday but will be reconsidered. Treasury yields climbed and traders are bracing for more market reaction. Treasury Secretary Scott Bessent dismissed Moody’s as a “lagging indicator” and said he doesn’t “put much credence” in the downgrade. (Bloomberg)(Reuters)(Market Watch)

2.

Rome rapport: The EU is seeking a defence pact with Australia to deepen military co-operation amid rising global instability, according to media reports. European Commission President Ursula von der Leyen put the proposal to Prime Minister Anthony Albanese in Rome, citing “massively increased” geopolitical tensions and describing Australia and Europe as “reliable partners.” She said the EU would be “very pleased” to develop a partnership like those with South Korea, Japan and soon the UK. Albanese said Australia was “certainly interested,” but talks were at a “very early” stage. Earlier, Albanese had said Australia was “up for a [trade] deal but not any deal at any price” with the EU, following failed 2023 trade talks over agricultural terms and quotas. Meanwhile, in a separate meeting, Albanese told Ukrainian President Volodymyr Zelensky that Abrams tanks were “already on their way” and confirmed willingness to consider a peacekeeping role. Zelensky thanked Australia for $1.5 billion in aid and urged “more sanctions on Russia.” (Capital Brief)(SMH)(Bloomberg)

3.

Unrealised losses: Startup and VC industry experts warn the Albanese government’s plan to tax unrealised gains in superannuation funds will create a “bizarre contradiction” with existing tax incentives for early-stage investment. Division 296, set to apply from 1 July 2025, would impose a 15% tax on unrealised gains in super balances over $3 million, directly conflicting with current exemptions for Early Stage Venture Capital Limited Partnerships (ESVCLPs) and Early Stage Innovation Companies (ESICs), where gains are generally tax-exempt when sold. Robert Nathan, an LP in Purpose Ventures and active angel investor, described the result as an “absurd situation” and called for an exemption from Division 296. It comes after Capital Brief reported last week that angel investors, including Dean McEvoy, have stopped or plan to halt investing due to the proposal. Before the election, Square Peg’s Paul Bassat also told Bronwen Clune the plan was “bad policy”. (Capital Brief)

4.

Rate cut: The RBA is widely anticipated to deliver a 25 basis point rate cut on Tuesday, as inflation returns to target and the global outlook deteriorates following US President Donald Trump’s tariffs. ANZ, CBA, Goldman Sachs and AMP all expect easing but differ on the path ahead. ANZ forecasts cuts in May, August and early 2026, while CBA sees easing in May, August and November. The RBA is unlikely to provide forward guidance, but updated forecasts may show weaker growth, rising unemployment and steady inflation. Global growth slowed to a 17-month low in April, according to S&P Global PMI data. May figures this week will reveal the first effects of Trump’s tariff truce. US retail earnings from Target, Lowe’s and Home Depot this week are also expected to offer further clues on consumer behaviour and how businesses are responding to the shifting tariff backdrop. (Capital Brief)(Bloomberg)(Reuters)

5.

AI news: News Corp will run mandatory artificial intelligence “bootcamps” for journalists across its Australian newsrooms, as it ramps up the technology’s use in production ahead of pay talks and amid growing uncertainty over AI’s impact on jobs. Journalists were informed last week they will undergo training in the coming months, covering the company’s proprietary AI tool, NewsGPT, and Google’s NotebookLM. Editorial-specific sessions will preview a new AI assistant being integrated into the content management system to support tasks like bullet points and standfirsts. An internal email seen by Capital Brief described the sessions as “a crucial part of our plan to embed AI in our daily workflows”. A News Corp Australia spokesperson said the workshops “will equip our staff with the new skills required for a new era”. The MEAA has signalled its members at News Corp could make AI-related demands, after securing similar conditions at Nine. News Corp signed a five-year US$250 million ($389 million) deal with OpenAI in 2023. (Capital Brief)

6.

Productive probe: The Productivity Commission (PC) identified 15 priority reforms to examine as productivity growth hits its “lowest ebb in 60 years,” according to chair Danielle Wood. The PC was charged with tackling productivity issues by the Albanese government in 2024 and will examine the 15 priority reforms over the course of five inquiries it’s conducting to address what Treasurer Jim Chalmers called “flatlining productivity.” Chalmers said the Labor government inherited the largest quarterly fall in productivity in 45 years, with productivity going backwards by 2.4% in the June quarter 2022. Chalmers said the government is “revitalising competition” through merger law reform, the 10-year Competition Reform Roadmap, and the $900 million National Productivity Fund. “We might not be able to run with everything,” Chalmers said, “but we will consider all of it and see what we can progress.” Consultation on the reform areas will be open through to 6 June. (Capital Brief)

7.

Russia-Ukraine war: Trump said he will speak with Vladimir Putin and Volodymyr Zelensky on Monday to end the “bloodbath” between the two countries, as Russian forces launched the largest known drone attack since the war broke out in 2022. Russia launched 273 drones targeting Ukraine’s Kyiv region on Sunday, according to Ukrainian authorities, killing one woman. Ukraine's intelligence service said it also believed Moscow intended to fire an intercontinental ballistic missile later on Sunday as an attempt to intimidate the West. Peace talks between the countries failed to broker a ceasefire on Friday after Putin skipped the talks he had initiated, prompting US President Trump to set a new meeting on Monday. “Hopefully it will be a productive day, a ceasefire will take place and … a war that should have never happened, will end,” Trump said. Zelensky said he had a “good meeting” with US Vice President JD Vance in Rome on Sunday. (FT)(Reuters)(Truth Social)(BBC)(WSJ)(Zelensky X)

8.

Israel conflict: Israel sent thousands of troops into Gaza on Sunday in a new ground offensive after Israeli air strikes targeting the enclave killed over 100 people on Saturday night. Local health authorities said that 48 people were killed in airstrikes in and around Khan Younis in the southern end of the Gaza Strip, while family homes in the Jabaliya refugee camp in northern Gaza were also hit. The Israeli military said the expanded ground operation is aimed at pushing Hamas to demilitarise and release remaining hostages. Israel’s military did not say how many troops have been deployed as part of the new offensive, named ‘Gideon’s Chariots.” Gaza is still under a blockade imposed by Israel, since it broke a six-week ceasefire in March. The news comes as Israel’s Defence Minister Israel Katz told MPs that the brother of late Hamas leader Yahya al-Sinwar, Mohammed Sinwar, was likely killed in an attack in the Gaza Strip last week. (Capital Brief)(Reuters)(Bloomberg)(WSJ)