Investors react to tentative US debt ceiling deal

NEW YORK (Reuters) – U.S. President Joe Biden and Republican Congressman Kevin McCarthy have reached a tentative deal to raise the federal government’s debt ceiling to $31.4 trillion, ending a months-long standoff.

But the deal is still struggling to pass through Congress before the United States runs out of money to pay its debts in early June.

COMMENTS:

BOB STARK, GLOBAL HEAD OF MARKET STRATEGY, KYRIBA,

VANCOUVER, CANADA:

While the White House debt ceiling agreement is great news, the US government still has a cash flow problem and time is running out to finalize the deals. The debt ceiling agreement is only the first step in rescuing the government from the brink of illiquidity.

The markets have already predicted that a deal will be reached this weekend. What investors will now focus on is the cost of spending cuts to the health of the US economy. What impact will these spending cuts have on GDP and economic growth?

Already, corporate CFOs are updating their cash forecasts to account for the costs of this debt ceiling deal, trying to project the impacts of spending cuts on their own organization’s financial projections. How many businesses will be negatively affected by the fallout from this deal? The cost of what Democrats waived on extending the two-year debt ceiling will be felt for the next decade as the US economy struggles to rebalance.

An immediate upside on Monday is that short-term Treasury yields will begin their return to normal, while U.S. Treasuries and Treasuries can return to their risk-free status and provide security for investors and the American people.

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

The debt ceiling agreement removes a tail risk to economic growth, but does not significantly change the baseline scenario. As a result, this is a modest positive for equity markets at the index level, but progressively more positive for areas such as weak balance sheet stocks, small caps and perhaps cyclicals. These have underperformed recently and are more exposed to growth and credit risks.

The story continues

DAMIEN BOEY, CHIEF MACRO STRATEGIST, BARRENJOEY, SYDNEY:

“We’ll have the optimism that a deal is done and a real crisis averted, and the dreaded cash drain at the same time. The net impact is ambiguous, but I think you’ll find that the volatility in interest rates Interest will rise, and that will cause banks and non-AI growth stocks to lag.”

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

“The deal still needs to pass both the House and Senate. Assuming the agreed-upon spending cuts don’t materially impact U.S. growth prospects, the debt deal should be both positive for risk and for the US dollar.

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

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

“There could be some initial relief that could push yields a little lower, as well as some upside in the US dollar, alongside equities. But the vagaries of getting the deal through Congress could put the brakes on.

And beyond that, the overriding implications of squeezing cash from issues to bolster liquidity that is very low at the Treasury can perversely boost yields and put a damper on equities. The dollar, however, can be bid higher.”

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

“There is definitely going to be some relief in fixed income markets. Where there was the most distortion from uncertainty was in credit markets and in the treasury market… I believe that on Tuesday, when the market reopens in the United States, we should see both of these distortions corrected.

“But what it doesn’t solve is that all along the Treasury curve, yields have been rising recently. And I think they’ve been rising in anticipation that there will be a lot of Treasury bill issues. Treasury, notes and notes in the coming weeks because the US Treasury needs to replenish its liquidity, and so I think Treasury bond yields will remain elevated for some time as this supply is absorbed.

“And I think stocks can do well here. It was definitely an overhang in the stock market.

“As for the dollar, I’m inclined to think it might strengthen the dollar a bit because it would weaken the de-dollarization argument. But not by much, just a little more, because the dollar has already weakened. has been strengthened a bit in recent weeks.”

AMO SAHOTA, DIRECTOR, KLARITYFX, SAN FRANCISCO:

“It will be pretty good for the market. I think it will keep expectations still pretty warm with the performance of the Nasdaq. It will be good for stocks.

“I think that might also give the Fed more reason to feel confident about trying to raise rates again. while he thinks that everything else being on par, the economy is still doing very well, we can see that, particularly in the tech sector, spending has also been quite robust.

“I think it’s holding the dollar up pretty well as well. I think generally everyone should be pretty happy with that, although we want to see what the color of the deal looks like. Initially it looks like it’s happening more than cuts, which is really what the Republicans were asking for.

“And it’s going to be important to see how long the deal lasts, whether…we’re going to face those same issues again. Or whether those issues are also going to be resolved with a long-term deal. I’m very, very doubtful that this is a long-term deal.”

(Reporting by Laura Matthews in New York and Tom Westbrook in Singapore; compiled by the Global Finance & Markets Breaking News team; editing by Kim Coghill and Andrea Ricci)

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