Debt-Limit Deal Brings Relief Tinged by Caution: Markets Wrap

American equity futures made modest gains after Friday’s strong showing on Wall Street, while European stocks wavered amid cautious optimism the US will avert a catastrophic default after the weekend’s tentative deal.

Contracts on the S&P 500 climbed about 0.2%, while those on the Nasdaq 100 were up around 0.4%. The dollar, which has benefited from angst around the statutory borrowing limit, held Friday’s decline while Treasury futures were flat in the absence of cash trading.

The Stoxx Europe 600 index erased an early advance amid thin liquidity with US, UK and some European markets closed for national holidays. SBB soared more than 8% after the embattled Swedish landlord said it may look to sell the company. Spain’s benchmark edged lower after Prime Minister Pedro Sanchez called a surprise snap election following heavy losses for his party in regional and local elections Sunday. Chinese shares headed toward a bear market.

President Joe Biden and House Speaker Kevin McCarthy expressed confidence that their agreement will pass through Congress. But even assuming lawmakers seal the deal before the US government runs out of cash in about a week, traders still have much to contend with — from the prospect of another interest-rate hike from the Federal Reserve to a likely deluge of bond issuance from the US Treasury Department.

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“The obvious positive interpretation is that a negative tail risk is close to being taken off the table,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “With the distraction of the debt ceiling fading into the background, investors can now refocus their attention on the underlying fundamentals. One concern, though, is that the fundamental picture remains precarious.”

European bonds rose, with Germany’s 10-year yield falling about 10 basis points.

Meanwhile, Turkey’s lira weakened after Recep Tayyip Erdogan won a presidential runoff election on Sunday, extending his time as the nation’s longest-serving leader and leaving investors looking for any signs he’ll start to relax the state’s tight grip over markets. The nation’s stocks benchmark gained.

Gold was flat on waning demand for havens, while as oil held onto Friday’s gains and Bitcoin climbed, reflecting a modestly buoyant tone.

‘Uncertainty Persists’

The agreement struck by Biden and McCarthy is running against the clock given that June 5 is the date when Treasury Secretary Janet Yellen has said cash will run out. There is plenty in the deal that Democrats and Republicans won’t like.

“Uncertainty persists regarding the duration and severity of the ongoing earnings recession, and perversely, the near-term tightening of liquidity may worsen due to the government’s need to address its debt issuance backlog,” said Suzuki. “While the markets managed to avert an immediate crisis, the coast is far from all-clear just yet.”

The rate-sensitive two-year Treasury drifted Friday as traders considered how a debt agreement could play into the Fed’s path forward on interest rates. The two-year yield hovered around 4.65% after a report on consumer spending showed the Fed still has more work to do to bring inflation back toward its target.

Source: Bloomberg

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