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Debt-Ceiling Negotiations Weigh on US Equity Indices

Market Update - Daniel Ang The Accidental Trader Traders Academy International 12

On Tuesday, US benchmark equity indices experienced a decline as negotiations on the debt-ceiling failed to show significant progress. According to Reuters, White House officials held a meeting with Republicans, but the two sides remained divided on how to address the federal deficit.

Despite President Joe Biden and House Speaker Kevin McCarthy describing their face-to-face meeting on Monday as “productive,” they were unable to reach a deal on the debt-ceiling, raising concerns about a potential default. McCarthy stated during the House Republicans’ weekly conference meeting on Tuesday morning that they were “nowhere near a deal.”

In a letter to congressional leaders, US Treasury Secretary Janet Yellen warned that it is “highly likely” the agency will be unable to meet all of the government’s obligations if Congress does not increase or suspend the debt limit by early June, possibly as early as June 1.

US Equity Indices Experience Declines
During Tuesday’s trading session, the Nasdaq Composite dropped by 1.3% to 12,560.3 points, while the S&P 500 fell by 1.1% to 4,145.6 points. The Dow Jones Industrial Average closed 0.7% lower at 33,055.5 points.

Treasury Yields Show Mixed Movements
On Tuesday, the US 10-year yield decreased by 2.1 basis points to 3.7%, while the two-year rate remained relatively unchanged at 4.33%.

New Home Sales Rise in the US
In April, new home sales in the US experienced a 4.1% increase, reaching the highest level since March 2022. Notably, prices declined during this period. The Census Bureau and the Department of Housing and Urban Development reported that single-family home sales grew on a monthly basis to a seasonally adjusted annual rate of 683,000, surpassing the revised figure of 656,000 from March. The consensus forecast was for 670,000 new home sales.

US Private-Sector Activity Reaches 13-Month High
According to the flash purchasing managers’ index, US private-sector activity in May reached its highest level in 13 months. The strength of the services sector compensated for a decline in manufacturing. However, manufacturing activity in the US Mid-Atlantic region unexpectedly fell further into contraction territory in May due to a decline in shipments and orders, as reported by the Federal Reserve Bank of Richmond.

US Dollar Strengthens amid Debt-Limit Concerns
The US Dollar reached a two-month high on Tuesday as the lack of progress in talks regarding the US debt limit dampened investors’ appetite for risk. While most market participants anticipate a deal in the future, the delay in reaching an agreement kept traders on edge.

Furthermore, better-than-expected economic data and hawkish comments from regional Fed presidents, including James Bullard and Neel Kashkari, on Monday contributed to the Dollar’s strength. This week, there has been a more hawkish sentiment among Fed officials following perceived dovish comments from Fed Chair Jerome Powell last Friday.

The Dollar Index reached 103.65, the highest level since March 20, and was last trading at 103.55. Additionally, the USD/JPY pair rose to 138.91, its highest point since November 30, before retracing to 138.57.

Fed Minutes Awaited for Insight on Rate Hikes
Market participants are eagerly awaiting the release of the minutes from the Federal Reserve’s May meeting, scheduled for tonight. These minutes will be closely analyzed for any indications as to whether the Fed is likely to pause its rate hikes in the coming month.

Crude Oil Prices Rise on Tighter Gasoline Market
Crude oil prices increased overnight due to forecasts of a tighter gasoline market and a warning from the Saudi energy minister directed at speculators. The warning raised the possibility of further output cuts by OPEC+. Brent crude futures rose by 85 cents, or 1.1%, settling at $76.84 per barrel. Meanwhile, West Texas Intermediate (WTI) crude closed at $72.91 per barrel, up 86 cents, or 1.2%.

Following the settlement, both benchmarks extended their gains to approximately 2% after the American Petroleum Institute (API) released data showing a significant draw in crude and gasoline inventories for the previous week.

Precious Metals Show Mixed Movements
Gold remained relatively unchanged at $1,995.90 per ounce, while silver experienced a 1.2% decline, reaching $23.58 per ounce.

Bitcoin and Ether Display Slight Gains
Bitcoin (BTC) is currently trading near $27,200, reflecting a 1.1% increase over the past 24 hours. BTC reached a peak of $27,500 during European trading. Over the past couple of weeks, BTC has been trading within a range of $26,500 to $27,500, with market sentiment affected by ongoing crypto regulatory issues and macroeconomic uncertainties, including the recent US debt-ceiling stalemate.

Ether (ETH) has also remained within its two-week range, with a current price of $1,850, representing an increase of approximately 1.6% over the past 24 hours. Other major cryptocurrencies have experienced minor gains, with APT and SOL, the native tokens of the Solana and Aptos smart contracts platforms, rising by 3.8% and 2.1%, respectively.

Hong Kong and China Cryptocurrency Trading Proposal
Investors are closely monitoring developments in Hong Kong and China as a proposed plan could allow retail investors in Hong Kong and institutional investors in mainland China to trade cryptocurrencies through Hong Kong. The Hong Kong Securities and Futures Commission is expected to announce the consultation conclusions on retail participation and launch a licensing regime for digital asset platforms on June 1.

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