U.S. debt-limit deal brings relief tinged by caution

American equity futures posted modest gains amid cautious optimism the U.S. will avert a catastrophic default after the weekend’s tentative debt-ceiling deal. European stocks wavered in muted holiday-affected trading.

Contracts on the S&P 500 climbed about 0.2 per cent, while those on the Nasdaq 100 were up around 0.3 per cent, with trading set to end early for Memorial Day. 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 edged lower, with Spain’s benchmark underperforming after Prime Minister Pedro Sanchez called a surprise snap election following heavy losses for his party in regional and local elections Sunday. Volumes were about 60 per cent lower than usual as markets in the U.K. and some European countries remained closed for national holidays. SBB gained after the embattled Swedish landlord said it may look to sell the company. A gauge of Asia-Pacific equities rose, though Chinese shares slid closer to a bear market.

President Joe Biden and House Speaker Kevin McCarthy expressed confidence that their agreement to curtail spending and extend the borrowing limit will pass through Congress. But even assuming lawmakers seal the deal before the U.S. 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 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 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 11 basis points. Spain’s 10-year yield dropped by a similar amount.

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 most of 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 per cent 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 the liquidity hassles to deal with, as the Treasury will issue a deluge of bonds to restore its cash reserves,” said Charu Chanana, market strategist at Saxo Capital Markets. “Not to forget, the hawkish re-pricing of the Fed path that we have seen last week could possibly get firmer if we get a hot jobs print this week.”

Key events this week:

• U.S. Memorial Day holiday. U.K., Switzerland and some Nordic markets also closed for holidays, Monday
• Eurozone economic confidence, consumer confidence, Tuesday
• U.S. consumer confidence, Tuesday
• Richmond Fed President Thomas Barkin interviewed by NABE as part of monetary policy webinar series, Tuesday
• China manufacturing PMI, non-manufacturing PMI, Wednesday
• U.S. job openings, Wednesday
• Fed issues Beige Book economic survey, Wednesday
• Philadelphia Fed President Patrick Harker has fireside chat on the global macro-economy and monetary conditions, Wednesday
• Boston Fed President Susan Collins and Fed Governor Michelle Bowman speak in Boston, Wednesday.
• ECB issues financial stability review, Wednesday
• China Caixin manufacturing PMI, Thursday
• Eurozone HCOB Eurozone Manufacturing PMI, CPI, unemployment, Thursday
• U.S. construction spending, initial jobless claims, ISM Manufacturing, light vehicle sales, Thursday
• ECB issues report its May 3-4 monetary policy meeting. ECB President Christine Lagarde speaks at German savings banks conference, Thursday
• Philadelphia Fed President Patrick Harker speaks on economic outlook at NABE’s webinar, Thursday
• U.S. unemployment, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

• S&P 500 futures rose 0.2 per cent as of 9:56 a.m. New York time
• Futures on the Nasdaq 100 rose 0.3 per cent
• The Stoxx Europe 600 fell 0.2 per cent
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.1 per cent to US$1.0709
• The British pound was unchanged at $1.2344
• The Japanese yen rose 0.3 per cent to 140.22 per dollar

Cryptocurrencies

• Bitcoin rose 1.3 per cent to $27,919.46
• Ether rose 2.5 per cent to $1,901.1

Bonds

• Germany’s 10-year yield declined 11 basis points to 2.43 per cent

Commodities

• West Texas Intermediate crude fell 0.3 per cent to $72.43 a barrel
• Gold futures were little changed

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