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

(Bloomberg) — U.S. stock futures edged up modestly after Friday’s strong showing on Wall Street, while European stocks faltered amid cautious optimism the U.S. will avert a catastrophic default after the weekend’s tentative deal.

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Contracts on the S&P 500 rose around 0.3%, while contracts on the Nasdaq 100 rose around 0.4%. The dollar, which has benefited from anxiety over the statutory borrowing limit, held Friday’s slide while financial 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 rose more than 8% after the embattled Swedish landlord said it may look to sell the company. Spain̵[ads1]7;s benchmark index eased after Prime Minister Pedro Sanchez called a surprise snap election following heavy losses for his party in regional and local elections on Sunday. Chinese stocks headed for a bear market.

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

“The obvious positive interpretation is that a negative tail risk is close to being taken off the table,” said Dan Suzuki, deputy managing director of investments at Richard Bernstein Advisors. “With the distraction of the debt ceiling receding into the background, investors can now turn their attention to the underlying fundamentals. One concern, however, is that the fundamental picture remains uncertain.”

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Meanwhile, the Turkish lira weakened after Recep Tayyip Erdogan won a presidential election on Sunday, extending his tenure as the country’s longest-serving leader and leaving investors looking for signs he will begin to loosen the state’s tight grip on markets. The nation’s benchmark index for shares rose.

Gold was flat on slowing safe-haven demand, while oil held on to Friday’s gains and Bitcoin climbed, reflecting a modest upbeat tone.

“Uncertainty persists”

The deal struck by Biden and McCarthy is counter-clockwise given that June 5 is the date Treasury Secretary Janet Yellen has said cash will run out. There is much in the deal that Democrats and Republicans will not like.

“Uncertainty remains over the duration and severity of the ongoing earnings recession, and perversely, the short-term liquidity squeeze could be exacerbated by the authorities’ need to address the backlog of debt issuance,” Suzuki said. “While markets managed to avert an immediate crisis, the coast is far from clear yet.”

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

“Markets will have liquidity issues to deal with as the Treasury will issue a flood of bonds to restore cash reserves,” said Charu Chanana, market strategist at Saxo Capital Markets. “Not to forget, the hawkish re-pricing of the Fed path that we’ve seen last week could possibly firm up if we get a hot jobs print this week.”

Important events this week:

• US Memorial Day holiday. The UK and some European markets are also closed for public holidays, Monday

• Economic confidence in the eurozone, consumer confidence, Tuesday

• US consumer confidence, Tuesday

• Richmond Fed President Thomas Barkin interviewed by NABE as part of the Monetary Policy Webinar Series, Tuesday

• China manufacturing PMI, non-manufacturing PMI, Wednesday

• Jobs in the US, Wednesday

• Fed issues Beige Book economic survey, Wednesday

• Philadelphia Fed President Patrick Harker has a fireside chat about the global macro economy and monetary conditions, Wednesday

• Boston Fed President Susan Collins and Fed Governor Michelle Bowman speak in Boston on Wednesday.

• ECB publishes financial stability review, Wednesday

• China Caixin manufacturing PMI, Thursday

• Eurozone HCOB Eurozone Manufacturing PMI, CPI, Unemployment, Thursday

• US Construction Spending, Initial Jobless Claims, ISM Manufacturing, Light Vehicle Sales, Thursday

• ECB editions report their monetary policy meeting on 3-4. May. ECB President Christine Lagarde speaks at the conference of German savings banks on Thursday

• Philadelphia Fed President Patrick Harker talks about the economic outlook at NABE’s webinar on Thursday

• US unemployment, non-farm payrolls, Friday

Some of the main features of markets:

Stock

• The Stoxx Europe 600 was little changed from 10:59 London time

• S&P 500 futures rose 0.3 percent

• Nasdaq 100 futures rose 0.4 percent

• Dow Jones Industrial Average futures rose 0.2%

• The MSCI Asia Pacific index rose 0.4%

• The MSCI Emerging Markets index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0716

• The Japanese yen rose 0.2% to 140.26 per dollar

• The offshore yuan fell 0.2% to 7.0874 per dollar

• The British pound was little changed at $1.2345

Cryptocurrencies

• Bitcoin rose 1.4% to $27,942.1

• Ether rose 2.7% to $1,904.9

Bonds

• The interest rate on 10-year government bonds was little changed at 3.80%

• Germany’s 10-year yield fell nine basis points to 2.44%

• UK 10-year yields fell four basis points to 4.33%

Raw materials

This story was produced with assistance from Bloomberg Automation.

–With assistance from Brett Miller and Ishika Mookerjee.

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