US debt-ceiling suspension spurs markets into risk-on mode

Stock markets will be driven by economic data from the world's biggest economy and Federal Reserve expectations

US President Joe Biden and House Speaker Kevin McCarthy reached a tentative agreement on Sunday to raise the nation's debt ceiling. Reuters
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The US dollar's prospects greatly improved over the course of May, with the Dollar Index up more than 2.54 per cent at the time of writing.

It has been largely “risk off” since my last column but fears around a potential breach of the US debt ceiling have largely passed.

News emerged this week that US President Joe Biden and House Speaker Kevin McCarthy had agreed on a deal in principle to suspend the debt ceiling until January 1, 2025.

What is the US debt ceiling?

What is the US debt ceiling?

We are not out of the woods yet – at the time of writing, the proposal still had to be passed by Congress.

The US will run out of cash to finance its bills no later than June 5.

Regardless of the uncertainty around the debt ceiling – getting a deal done was a foregone conclusion – it is the nature of the details that will determine its impact on markets.

In my previous column, the news was that the US debt ceiling would be increased by $1.5 trillion.

This would force the US Treasury into a debt-raising exercise, which could have acted as a drain on liquidity in other markets.

However, this week’s developments indicate that the US government is not increasing the ceiling by a specific amount – instead it is suspending it for another 19 months.

In essence, this means that there is no debt ceiling in place until the next deadline in January 2025.

This will, undoubtedly, garner a risk-on approach in markets in the short term.

However, we need to keep in mind how US Federal Reserve policy is shaping up.

The Fed has been delivering more hawkish tones to markets – with some officials favouring rate increases in June, while others hint at a pause and resumption of increases later in the year.

Last week’s US core personal consumption expenditures print – the Fed’s preferred measure of inflationary conditions – came in higher, both year on year at 4.7 per cent and month on month at 0.4 per cent.

The CME’s FedWatch Tool is now pricing in a 66.4 per cent probability that interest rates will rise to between 5.25 per cent and 5.5 per cent – up from 25.7 per cent on May 22.

Unfortunately, markets will be driven by US data and Fed expectations – once again. But the current range-bound trading will continue as markets wait and watch how the Fed will proceed.

Gold has had a difficult month on the back of a stronger dollar and was more than 2.22 per cent lower in May against the greenback.

While my $1,970 target was achieved, the precious metal has moved to $1,945 levels.

I am expecting range-bound trading in the precious metal with a bearish bias – $1,933 would need to hold before we expose $1,880 levels in the coming weeks.

Gold's upside will be capped in the channel between $1,980 and $2,000 in the weeks ahead.

Keep an eye out for US payrolls – due at 4.30pm Dubai time on Friday.

Expectations are for 180,000 new jobs to have been added in May – any beat on the upside on this reading will have more dollar strength pouring into markets and vice versa.

US inflation data will come out on June 13, while the Fed rate decision meeting and announcement are due at 10pm on June 14.

For short-term traders, the current ranges may continue to provide day trade opportunities. However, for positional traders or investors, it may, once again, prove prudent to wait and see how the data progresses.

Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers

Updated: May 31, 2023, 5:45 AM