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Market Optimistic About Debt-Cap-Talks But Risk-off Remains

Olusegun Enujowo


Markets remain nervous in the face of increasing signs of a global economic slowdown and indications that the Fed will not back away from its tight monetary policy. However, the main focus remains on the ongoing U.S. debt ceiling negotiations in Washington. Concerns that no agreement can be found in time for the June 1 deadline continue to unsettle markets.

However, the emergency negotiations, as well as U.S. President Biden's cancellation of the second leg of an upcoming foreign trip, show that all sides are pushing to find an agreement (of course). "I think at the end of the day there is no default," White House spokesman Kevin McCarthy said yesterday - and of course they MUST find an agreement. Right now, it's more about a political stalemate and Republicans trying to capitalize on the situation.

A breakthrough would give markets a short-term tailwind and even lead to a short-term rally given the current sideways movement - even if a positive outcome is absolute. 

In the meantime, Treasury bonds maturing after June 1 remain under pressure as the cost of insuring sovereign bonds in the credit default swap market skyrockets on lingering concerns about a U.S. default. Cash (=USD) is king at the moment and is even putting pressure on gold, although gold is an attractive hedge in this situation. The attractiveness of the USD, weighs on other safe haven currencies like the JPY and CHF.

Positive news about a troubled US regional bank also helped ease concerns and provides slight tailwinds to the financial sector. Western Alliance Bancorp jumped after the regional lender reported an increase in deposits this quarter.

For most of the rest of the week, we see an overall quiet economic calendar. On Friday, the main focus will be on Fed Chairman Powell's speech. Before that, comments from Fed officials could paint a picture of longer-lasting high interest rates in the US.

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