June 1, an indicated deadline by the U.S. Minister of Finance, Janet Yellen, for resolving debt-ceiling issues, in nearing rapidly. This is also International Children’s Day established in 1949 by Russia and celebrated in post-Communist countries, in Eastern European Countries and some Asian nations like China and Vietnam.
Thus, the United States may simply ignore celebrations and share its childish debt troubles with other nations all over the world. Central banks across the globe hold around 50% of its reserves in U.S. debt that totals $31.4 trillion, or 129% of America’s GDP.
The pressure is mounting as Democrats and Republicans continue uneasy talks to deliver a compromise as soon as they get the juice. GOP is demanding spending cuts by more than $4.5 trillion. “You have to spend less than you spent last year,” Kevin McCarthy, a House Republican speaker, said at a news conference in the Capitol. Democrats rejected the offer and pushed for a freeze on current spending levels. Meanwhile, warning signals have emerged as Fitch Ratings agency placed U.S. AAA sovereign rating under review with a negative rating watch.
The markets seem to be reluctant to these political battles as investors passionately believe the issue will be resolved in a timely manner. “I wouldn’t scare the markets in any shape or form. We will come to an agreement worthy of the American public, and there should not be any fear. Money is coming in every day,” McCarthy added.
CBOE Volatility Index, which is widely known as the Index of Fear or VIX, is below 20 points, which indicates moderate risk in the stock market. Even though, VIX is declining by 1.5%. European stocks also show no alarming signs.
Investors prefer to follow the old Dow principals that “History is repeating” as Congress raised the debt ceiling 45 times in the last 40 years, and never stoned the issue. As Mark Twain said: “Giving up smoking is very easy… I’ve done it hundreds of times”.
Indeed, a real default would be very cataclysmic for the United States as many jobs will be lost and the economy will stall. So, this is not the reality both Congressional parties are heading for. Once the issue is resolved, it may boost markets up. U.S. GDP data in this regard is very vital for the market. The data that was released on May 25 came out very optimistic, as Q1 2023 GDP is at 1.3% beating consensus at 1.1%. Initial jobless claims were at 229,000, less than 250,000 expected. All this data allows the Federal Reserve (Fed) to make more interest rate hikes without really fearing an economic slowdown.
The lifting of the debt ceiling in the existing situation may boost U.S. Treasuries yields, as the Fed may raise its interest rates to 5.50-5.75% from the existing 5.25% over the coming months. Delayed demand for the new U.S. debt will also play a role here. Overall, this may boost the U.S. Dollar and the U.S. Dollar index to 105.0-105.8 points, a new high in 2023. This can put some pressure on the stock indexes, and may lower the S&P 500 index to 4000 points.
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