Asia wrap: Mission almost accomplished

Mission almost accomplished

Negotiators appear to be closing in on an agreement. While it is hard to predict when an announcement could come, we think the odds are high that a deal will be announced late Friday or Saturday. If so, this would likely allow a House vote late Tuesday or Wednesday before x date, June 1.

While there are some concerns that discussions could drag out if politicians sense the Treasury will not be close to depleting funds by June 1, some lawmakers might begin to see the hard deadline as slightly softer.

Still, negotiation strategy and political incentives imply a down-to-the-wire deal. Hence it would be surprising if investors aren't popping corks Friday night or breathing a sigh of relief come Monday morning.

Nuts and bolts

Since December '21, investors of many stripes have been bearish on the outlook for risk assets as the Fed was intent on tightening financial conditions and was about to start a cycle from behind the curve. As of this month, bearishness has permeated the investor base, and positioning and sentiment look very stretched. 

While the direction of travel hasn't changed (tighter financial conditions), the market looks increasingly at risk of snap-back rallies. To sustain this bearishness would likely require a continuous flow of bad news or additional hawkishness from the Fed. A lot has been priced into both.  

And with inflation expected to fall further, the Fed guiding the market to June pause just as the economy is shifting more favourably, so barring a scenario where something breaks (e.g. debt ceiling, regional banks), we may see soft landing retake roots.