Investors react to tentative US debt ceiling deal

 – US President Joe Biden and top congressional Republican Kevin McCarthy have reached a tentative deal to suspend the federal government’s $31.4 trillion debt ceiling, ending a months-long stalemate.

But the deal still faces a difficult path to pass through Congress before the US runs out of money to pay its debts in early June.

 

COMMENTS:

EDWARD MOYA, SENIOR MARKET ANALYST AT OANDA IN NEW YORK

“The risks of a downgrade are still there. It’s important that lawmakers take this serious and are not posturing, or trying to appease their bases.

“The dollar is still the reserve currency, but it’s going to lose some of that status.”

 

STEVEN RICCHIUTO, U.S. CHIEF ECONOMIST AT MIZUHO SECURITIES USA LLC, NEW YORK.

“The importance of passing the debt limit is critical. They all want to get it out past the election process and they did get a freeze on spending, which creates a real decline in a number of spending programs. The radicals on each side are not going to vote for this, it’s the people in the middle.

 

ANDRZEJ SKIBA, HEAD OF BLUEBAY U.S. FIXED INCOME AT RBC GLOBAL ASSET MANAGEMENT, NEW YORK.

“There should be enough support across both sides of the aisle to see the agreement gain approval first in the House and then in the Senate. Feels like a race against time before the June 5th deadline, but it should be done in time. Will be noisy, but in the end a default should be avoided.

“What’s more important is that the agreement, as proposed, prevents the debt ceiling drama from re-occurring until after the next election. After a number of tumultuous weeks, most will see that as the biggest achievement.

“The prospect of non-payment on a Treasury bill should go away. Money market funds can stop worrying about what securities they hold and yields for near term maturities should normalize.

“On the flip side, we should now expect an avalanche of Treasury bill issuance over the coming weeks as the government replenishes its coffers. This withdrawal of liquidity from the market is largely expected, however it could still impact valuations across US government fixed-income securities.”

 

KHOON GOH, HEAD OF ASIA RESEARCH, ANZ, SINGAPORE:

“Markets have already responded positively to the agreement. Of course there are still a couple of hurdles to get through … and there’s still potential for some spanner in the works, but for now markets are working off the assumption that the agreement will be passed and have already started to move on from that.

“For the dollar, it’s somewhat of a mixed bag. We have seen the dollar strengthen in the last couple of weeks as a result of the debt ceiling uncertainty. The dollar did manage to stay quite firm even when the agreement was announced. I think part of that is because it’s getting some support from the increased expectations of the June hike and also markets are focusing on the large issuance that the US Treasury will be making once the agreement is signed off. That could potentially tighten liquidity in the near term which could keep US yields elevated hence helping to support the dollar in the near term.

“Markets are pricing in as if the deal is going to get passed, so that is the risk that we face at the moment, if, for whatever reason, the agreement does not get passed … especially if it doesn’t get passed by the time the X-date is due … then the rally that we’ve seen late last week and so far early today, will definitely unravel and will lead to a huge selloff.”

 

BOB STARK, GLOBAL HEAD OF MARKET STRATEGY, KYRIBA, VANCOUVER, CANADA:

“While the White House’s debt ceiling agreement is great news, the US government still has a cash flow problem and time is of the essence to finalize the agreements. The debt ceiling agreement is only the first step in saving the government from the brink of illiquidity.”

“Markets already priced in that an agreement would be made this weekend. What investors will now focus on is the cost of the spending cuts to the health of the American economy. How much impact will these spending cuts have on GDP and economic growth?”

“Already corporate CFOs are updating their cash forecasts to factor in the costs of this debt ceiling agreement, trying to project the impacts of the spending cuts on their own organization’s financial projections. How many businesses will be adversely affected by the fallout from this agreement? The cost of what the Democrats gave up to extend the debt ceiling by two years will be felt for the next decade as the American economy struggles to rebalance itself.”

“One immediate benefit on Monday is that short-term treasury yields will start their return to normal, whereas US T-Bills and treasury notes can march back to their risk-free status and provide security to investors and the American people.”

 

STUART KAISER, HEAD OF EQUITY TRADING STRATEGY, CITI, NEW YORK:

“The debt ceiling deal removes a tail risk to economic growth but doesn’t meaningfully shift the base case. As a result, it’s a modest positive for equity markets at the index level but incrementally more positive for areas such as weak balance sheet stocks, small cap and perhaps cyclicals. Those have underperformed recently and have higher exposure to growth and credit risks.”

 

DAMIEN BOEY, CHIEF MACRO STRATEGIST, BARRENJOEY, SYDNEY:

“We will get the optimism that a deal is done and that a real crisis is averted, and the dreaded liquidity drain at the same time. The net impact is ambiguous, but I think you will find that interest rate volatility .MOVE will rise, and this will cause banks and non-AI growth stocks to be laggards.”

 

MOH SIONG SIM, CURRENCY STRATEGIST, BANK OF SINGAPORE, SINGAPORE:

“The deal still needs to be passed by both the House and Senate. Assuming that the agreed spending cuts do not materially impact the US growth outlook, the debt deal should be both risk and US dollar positive.

“The need for Treasury to rebuild its cash balance could tighten liquidity.”

 

VISHNU VARATHAN, HEAD OF ECONOMICS, MIZUHO BANK, SINGAPORE:

“There may be an initial sliver of relief that may send yields a tad lower along with some US dollar bump-up, alongside equities. But the vagaries of pushing the deal through Congress may hold back.

And beyond that the overriding implications on liquidity squeeze from issuances to bolster cash that is running very low at the Treasury may perversely elevate yields and dampen equities. The dollar, though, may be bid.”

 

THIERRY WIZMAN, GLOBAL FX AND INTEREST RATES STRATEGIST, MACQUARIE GROUP, NEW YORK:

“There is certainly going to be a relief in the fixed income markets. Where there were the most distortions from the uncertainty was in the credit markets and in the Treasury bill market… I think on Tuesday, when the market reopens in the US, we should see those two distortions fixed.

“But what this doesn’t solve, is that along the whole Treasury curve yields have gone up recently. And I think they went up in anticipation that there will be a lot of issuance of Treasury bonds and notes and bills in the next few weeks because the U.S. Treasury has to replenish its cash. And so, I think Treasury bond yields will stay high for a while as that supply is absorbed.

“And I think stocks can do okay, here. This was certainly one overhang over the stock market.

“As far as the dollar goes, I’m inclined to think that it could strengthen the dollar a little bit because it will weaken the argument for de-dollarization. But not by much, just a little bit more, because the dollar has already strengthened in the last few weeks quite a bit.”

 

AMO SAHOTA, DIRECTOR, KLARITYFX, SAN FRANCISCO:

“This will be pretty good for the market. I think it will keep the expectations still pretty red hot with how the Nasdaq has been performing. It will be good for equities.

“I think it may also give more reason for the Fed to feel confident about trying to lift up rates again. I think the market may actually seize the opportunity to price in a little bit more tightening in June, if they think that all else being equal, the economy is still running pretty hot. We can see that, the lift up in the tech sector in particular. Spending has been pretty robust as well.

“I think this just holds the dollar up pretty well as well. I think, generally, everybody should be pretty happy with this, although we want to see what the color of the deal looks like. Initially, it looks like this is coming more from cuts, which is really what the Republicans were pushing for.

“And it’ll be important to see how long the deal is for, whether … we’re going to face these same issues again. Or whether those matters are also going to be resolved with a long-term deal. I very, very much doubt it’s a long-term deal.” – Reuters