Debt ceiling deal delivers relief, but market faces more trials

US averts default, sparks market relief

In a collective sigh of relief, regional equity markets and US stock futures are basking in the news of a tentative deal clinched by US President Joe Biden and House Speaker Kevin McCarthy.

This critical agreement, designed to raise the debt ceiling, averts a potentially catastrophic default. As the prospect of financial Armageddon loomed, default was never truly on the table.

However, the danger that negotiations might overshoot the theoretical X-date was palpable. Such a scenario would've compelled the US Treasury to juggle a medley of special measures, concessions, and preferential payments, in a replay of the mid-'90s, where financial and political destruction was rife.

The ball is now in Congress's court, as we anticipate the legislation's passage within the week.

Fitch's warning shot: US sovereign debt under scrutiny

Last week's announcement by Fitch to put the United States Sovereign Debt on credit watch negative may have been the catalyst to hasten the debt deal. Unfortunately, the terms of the deal that allow the debt ceiling to remain uncapped for two years will do little to ease Fitch's angst and may still result in a costly downgrade.

"The failure of the US authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden."

Another side effect of leaving a deal to the eleventh hour is that the cash balance in Treasury's account used for daily payments has fallen to less than US$50 billion and needs rebuilding. To do this Treasury is expected to issue US$1 trillion of bills over the next two months, draining liquidity from the system.

Rate hike on the horizon: Market anticipates tighter monetary policy

In isolation, a liquidity drain would be more manageable if not for the hotter-than-expected Core PCE Price Index print on Friday night (4.7% in April vs 4.6% exp). Fuelled also by hawkish overtones from numerous Fed speakers, the rates market is now assigning a 65% chance of a 25bp rate hike for the upcoming June FOMC meeting. The 100bp rate cuts priced into the US rates market by year-end after the banking crisis has narrowed to just 35bp.

While the weekend's debt deal has enabled markets to breathe a sigh of relief, the market will likely soon focus on the impact of tighter liquidity, a sovereign debt downgrade, and higher interest rates.

S&P 500 technical analysis

Holding a high-conviction technical view has been impossible while debt ceiling negotiations played out. Now they are in the rear vision mirror, presuming the S&P 500 can hold above range highs 4210/4185 (closing basis), allow for the S&P 500 to rally initially towards the August 4327.50 high.

Aware that a daily close below 4185 would warn the break higher has failed and likely see another round of choppy range trading unfold, with scope back to 4060ish.

S&P 500 daily chart

Nasdaq technical analysis

Post the Nvidia earnings report at the end of last week and this morning's debt deal rally, the Nasdaq is officially well and truly into overbought territory.

However, as viewed during the dot com bubble in the late '90s and many others since, when animal spirits take hold, rallies can extend a lot further than expected. Dips will likely be shallow and well-met by buyers eager to participate in the current AI euphoria.

Nasdaq daily chart

Dow Jones technical analysis

The saying goes that a rising tide lifts all boats. However, the Dow Jones really needs to break above the recent 34,257 high and the 34,342 year-to-date high to re-energise its upside prospects.

In this case, we would expect to see a test of the 34,712 high from December 2022 with scope to the 35,492 high from April 2022.

Dow Jones daily chart

ASX 200 technical analysis

Like its old economy counterpart in the US, the Dow Jones, the ASX 200 has languished in recent weeks due to a lack of heavyweight IT stocks within the index. That said, the debt ceiling deal has provided a lift for the ASX 200 this morning, with all sectors in positive territory apart from Consumer Discretionary.

If the ASX 200 can break above downtrend resistance at 7300, coming from the February 7567 high, it would likely see the ASX 200 extend gains towards 7390/7400 in the short term.

ASX 200 daily chart

^{TradingView: the figures stated are as of May 29, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}