The debt-limit deal brings cautious relief: markets have turned

(Bloomberg) — US stock futures posted modest gains amid cautious optimism that the US will avoid a catastrophic default after the weekend’s interim debt ceiling deal. European stocks fluctuated amid quiet trading affected by the holiday.

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Contracts in the S&P 500 and Nasdaq 100 rose about 0.3% each, as cash markets closed for Memorial Day. The dollar, which benefited from concern over the legal borrowing limit, held lower on Friday while Treasury futures linked to the 10- to 30-year portion of the US government bond market rose in light of volume.

The Stoxx Europe 600 fell, as the Spanish index underperformed after Prime Minister Pedro Sanchez called a surprise snap election following heavy losses for his party in Sunday’s regional and local elections. Volumes were 60% lower than normal with markets in the UK and some European countries closed for national holidays. It acquired SBB after the beleaguered Swedish owner said it might look to sell the company. The gauge of stocks in Asia Pacific rose, although Chinese stocks slipped near a bear market.

President Joe Biden and House Speaker Kevin McCarthy have expressed confidence that their agreement to cut spending and extend the borrowing limit will pass through Congress. But even assuming lawmakers strike the deal before the US government runs out of cash in about a week, traders still have a lot to grapple with – from the prospect of another rate hike from the Federal Reserve to the potential deluge of bond issuance from the US. US Treasury.

“The obvious positive interpretation is that the negative tail risk is about to be removed,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “With the distraction from the debt ceiling fading into the background, investors can now refocus their attention on the underlying fundamentals. One concern, however, is that the fundamental picture remains very risky.”

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European bonds rose, with the German 10-year bund yield down nearly 11 basis points. The Spanish 10-year bond yield fell by a similar amount.

Meanwhile, the Turkish lira weakened after Recep Tayyip Erdogan won a presidential run-off on Sunday, extending his tenure as the country’s longest-serving leader and leaving investors looking for any signs that he would begin to loosen the state’s tight grip on markets. The country’s stock index gained.

Gold was flat on waning demand for havens, while oil held most of Friday’s gains and bitcoin rallied, reflecting a modest booming tone.

The uncertainty continues

The deal struck by Biden and McCarthy is running against time given that June 5th is the date Treasury Secretary Janet Yellen said the cash would run out. There is a lot in the deal that Democrats and Republicans don’t like.

“Uncertainty remains regarding the duration and severity of the ongoing slump in earnings, and conversely, near-term liquidity tightening may be exacerbated by the government’s need to address delayed debt issuance,” Suzuki said. “While the markets have managed to avoid an immediate crisis, the coast is not yet entirely clear.”

The two-year rate-sensitive Treasury sidelined on Friday as traders factored in how the debt agreement could play a role in 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.

“Markets will have liquidity headaches to deal with, as the Treasury will issue a flood of bonds to restore its cash reserves,” said Charu Chana, market analyst at Saxo Capital Markets. “Don’t forget that the aggressive repricing of the Fed’s path that we saw last week could get even firmer if we get a hot jobs print this week.”

Main events this week:

• Eurozone Economic Confidence, Consumer Confidence, Tuesday

• US Consumer Confidence, Tuesday

• Richmond Federal Reserve Chair Thomas Barkin in an interview with NABE as part of our Monetary Policy Webinar Series, Tuesday

• China manufacturing PMI, non-manufacturing PMI, Wed

• US Employment Opportunities, Wed

• The Federal Reserve releases the Beige Book Economic Survey, Wednesday

• Philadelphia Federal Reserve Bank President Patrick Harker had a live chat about global macroeconomic and monetary conditions, on Wednesday

• Boston Federal Reserve Chair Susan Collins and Federal Reserve Bank Governor Michelle Bowman speak in Boston, Wednesday.

• The European Central Bank issues its financial stability review, Wednesday

• China Caixin Manufacturing Purchasing Managers, Thursday

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

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

• The European Central Bank will release a report on its monetary policy meeting on May 3-4. European Central Bank President Christine Lagarde speaks at the German Savings Banks Conference, Thursday

• Philadelphia Fed President Patrick Harker speaks about the economic outlook at a NABE webinar, Thursday

• US Unemployment, Nonfarm Payrolls, Friday

Some of the major movements in the markets:

Stores

• S&P 500 futures were up 0.3% as of 11:53 a.m. New York time.

• Nasdaq 100 futures rose 0.3%.

• The Stoxx Europe 600 fell 0.1%.

• The MSCI World Index was little changed

currencies

• The Bloomberg Spot Dollar Index has not changed

• The euro was little changed at $1.0715

• The British pound rose 0.1% to $1.2360

• The Japanese yen rose 0.2% to 140.27 per dollar

Digital currencies

• Bitcoin rose 0.3% to $27,655.32

• Ether rose 1.9% to $1,890

bonds

goods

This story was produced with help from Bloomberg Automation.

— With assistance from Brett Miller and Ishika Mukerji.

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