Stocks Fall on Debt-Deal Impasse as Deadline Looms: Markets Wrap

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24 May 2023, 06:38 AM IST

Abrdn Investment Director James Athey says there is still downside risk to equities and debt markets even if a debt deal is reached. He speaks with Jonathan Ferro on "Bloomberg The Open."

(Bloomberg) -- US stocks fell and short-dated Treasury bills extended losses as negotiations over raising the US debt ceiling remained at an impasse.

Negotiations continued Tuesday. However, progress appeared limited, with some House Republicans questioning the urgency of a deadline imposed by Treasury Secretary Janet Yellen for when the government will start missing debt payments.

Investors have been demanding higher premiums to hold US debt, especially those at the highest risk of default, with little time left for politicians to find an agreement. Yields on securities maturing June 6 topped 6% Tuesday compared to bills maturing May 30 that are yielding about 2%.

“The fact that some of these politicians are contemplating default publicly is a bad sign,” said Mike Zigmont, head of trading and research at Harvest Volatility Management.

The S&P 500 fell , led lower by industrials and communication stocks. Lowe’s Cos. cut its sales outlook, citing a slowdown in consumer spending. Broadcom Inc. signed a multibillion-dollar deal with Apple Inc. to develop 5G radio frequency components. And a rout in luxury-good makers including Hermes International wiped out more than $30 billion in value.

President Joe Biden and House Speaker Kevin McCarthy called their discussions on Monday productive. But an agreement on the debt limit remains elusive, with McCarthy pleading with Republicans to stay united on their demands in order to avert a US default.

“As investors, it’s really hard to price the debt ceiling,” said Remi Olu-Pitan, head of multi-asset growth and income at Schroders. “We have nothing to hold onto. We know that it’s a big risk, but it’s really hard to quantify and position for in advance.”

Invesco Chief Global Market Strategist Kristina Hooper said she sees a brief technical default as a real possibility, which is more likely to be reflected in bond prices, rather than stocks.

“The negotiating parties have gotten more pessimistic,” she said. “And it suggests to me that we’ll see more market turbulence in coming days.”

Stocks Fall on Debt-Deal Impasse as Deadline Looms: Markets Wrap

Read more: US Default Scenarios Span From Localized Pain to Dimon’s ‘Panic’

In economic news, US new-home sales unexpectedly rose to a more than one-year high, and US business activity grew in May by the most in over a year.

Minneapolis Fed President Neel Kashkari said Tuesday that if inflation were to become more entrenched, the Federal Reserve could keep interest rates elevated for longer.

Minutes expected Wednesday from the last Federal Open Market Committee meeting will offer traders the latest insights into whether interest rates will be paused at the Fed’s next meeting in June.

“While a pause might not strictly translate to terminal, it goes without saying that the bar to restart hikes will be very high in the current environment,” BMO strategist Ian Lyngen wrote in a note.

The debt ceiling debate “feels like the third trimester of pregnancy,” Amy Wu Silverman, RBC Capital Markets head of derivatives strategy, says during an interview with Jonathan Ferro on “Bloomberg The Open.”Source: Bloomberg

Key events this week:

Fed issues minutes of May 2-3 policy meeting, Wednesday
Bank of England Governor Andrew Bailey speaks, Wednesday
US initial jobless claims, GDP, Thursday
Interest rate decisions in Turkey, South Africa, Indonesia, South Korea, Thursday
Tokyo CPI, Friday
US consumer income, wholesale inventories, durable goods, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

The S&P 500 fell 1.1% as of 4 p.m. New York time
The Nasdaq 100 fell 1.3%
The Dow Jones Industrial Average fell 0.7%
The MSCI World index rose 0.2%

Currencies

The Bloomberg Dollar Spot Index rose 0.2%
The euro fell 0.4% to $1.0768
The British pound fell 0.2% to $1.2410
The Japanese yen was unchanged at 138.60 per dollar

Cryptocurrencies

Bitcoin rose 1.1% to $27,189.22
Ether rose 1.8% to $1,851.79

Bonds

The yield on 10-year Treasuries declined one basis point to 3.70%
Germany’s 10-year yield advanced one basis point to 2.47%
Britain’s 10-year yield advanced nine basis points to 4.16%

Commodities

West Texas Intermediate crude rose 1.5% to $73.10 a barrel
Gold futures were little changed

This story was produced with the assistance of Bloomberg Automation.

--With assistance from Cecile Gutscher, Tassia Sipahutar, Robert Brand, Jason Scott, Ishika Mookerjee and Allegra Catelli.

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