Caution with the debt ceiling optimism [Video]

Ipek Ozkardeskaya Swissquote Bank Ltd

The holiday shortened trading week starts tense but on an optimistic note as US President Joe Biden and House Speaker Kevin McCarthy finally reached an agreement to raise the debt ceiling. The deal must get approval in a congressional vote on Wednesday.

Presently, it feels like investors are confident that the US debt ceiling will be raised. The kneejerk reaction to a debt ceiling deal will be positive but gains could remain short-lived.

The latest economic data suggested last Friday that US inflation didn’t ease as much as analysts expected in April.

The data boosted odds that the Fed would opt for one last hike at next month’s policy meeting. Activity on Fed funds futures now assesses more chance for a 25bp hike in June, than a no hike.

Prospects of lower market liquidity amid the end of the US debt ceiling crisis, and hawkish Fed expectations are both reasons to turn bearish on stocks.

But the S&P500 closed last week above the 4200 level, while Nasdaq 100 jumped more than 2.50% and hit the highest levels since April 2022 though the US 2-yer yield rose for the 12th straight session.

Rising US yields continue giving a decent support to the US dollar, the USDJPY consolidates above the 140 mark, as the EURUSD tests 1.07 to the downside.

Gold is down to the 100-DMA, while oil pushes higher on poor conviction into June 3-4 OPEC meeting.

Author

Ipek Ozkardeskaya

Swissquote Bank Ltd

Ipek Ozkardeskaya began her financial career in 2010 in the structured products desk of the Swiss Banque Cantonale Vaudoise. She worked in HSBC Private Bank in Geneva in relation to high and ultra-high-net-worth clients.

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