One uncertainly eases another pops up

Markets

Volumes should return to normal today after the US long weekend, so we should get a much better read on market trends where optimism over a U.S. debt ceiling agreement may continue to support risk assets for the early part of the week. But after the relief rally, the focus could turn back on the many concerns that have kept most Wall Street analysts on the bear path. The first boat rocker could be Friday’s employment report for May which takes on immense importance as that will be the last major data point that Fed officials will have a chance to comment on before their June 14th rate decision.

The agreement between President Biden and House Speaker McCarthy eliminates the highest hurdle and most of the uncertainty regarding the debt limit. Although the upcoming votes in Congress still pose a tiny risk, the main risk has been that political pressures would prevent a deal from coming together. Now that a deal has been reached, it will likely pass both chambers of Congress in the coming week.

Deal or no deal, a US debt rating downgrade is still a strong possibility; after putting the US on notice last week, Fitch may forge ahead with a rating downgrade, deal or no deal inside the Beltway. And this won't simply be based on America's worsening fiscal trajectory but also the pervasive political polarization or what the agency described as " sings of a deterioration in governance. " That deterioration was the subject of a May 24 newsletter (before the agency warning) 

Beyond economics, the debt limit debate highlights the political polarization that persists in the US. and casts a cloud over the political process in Washington. And the repeated brinkmanship could catch the eye of the rating agencies once again.

As it was back when S&P downgraded the US credit rating in 2011, the underlying issue was the worsening political polarization, and it's hard to argue that the process has done anything other than continue to worsen since 2011

The point here isn't about the S&P 500 or the price of oil, but the fact that some analysts still expect a US downgrade where the rationale is as much about political and societal disintegration as it is about the fiscal trajectory is worrying, to put it mildly. 

Asia

To say China’s economic opening has been a disappointment could be an understatement, especially as reflected in local stocks that are now on the cusp of a bear market. Chinese equities have been pretty disappointing, as is true of most cyclical exposures, notably oil. Structural allocators of long-only capital are reticent to commit to this market as growing US-China tensions increasingly make China uninvestable -- that lack of sponsorship is partly what ails that tape.

Covid 2nd wave in China

Over the past week, chatter has increased regarding the second wave of Covid in China. Note that the national CDC has stopped weekly updates of Covid statistics since April 29th. But the Beijing CDC has continued to release their weekly report, which shows that Covid has overtaken flu infection cases since the last week of April.

Zhong Nanshan, a top expert on respiratory diseases, said that the second wave of Covid will likely peak at the end of June. So far, it has been reported that patients’ symptoms this time around are milder and duration shorter compared to the December/January "exit wave". The high-frequency tracker data shows that subway ridership remained largely in line with their seasonal patterns in late May. Taken together, the economic impact of the second wave should be limited.