Negotiations on the US debt ceiling are deadlocked. In Germany, there is a drop in business optimism

May 25, 2023

The US stock indices ended Wednesday’s trading in decline, as negotiations between the White House and Republican representatives to raise the US debt ceiling were seriously delayed. By the close of trading, the Dow Jones Index (US30) decreased by 0.77%, while the S&P 500 Index (US500) lost 0.73%. Technology Index NASDAQ (US100) fell by 0.61% yesterday.

The lack of progress on raising the US government’s $31.4 trillion debt limit before the June 1st deadline, with several rounds of inconclusive negotiations, has irritated investors as the risk of a catastrophic default grows. There are only seven calendar days left until June 1st, with about three days to process all the paperwork if there is a deal. Therefore, the US politicians have only four days left to find common ground.

The Fed meeting minutes showed that future rate hikes are less certain and preferred to keep policy flexibility as inflation continues to outpace the trend and the impact of the banking crisis remains uncertain. Some participants noted that, based on their expectation that progress in bringing inflation down to 2% may remain unacceptably slow, additional policy tightening would likely be needed at future meetings. Federal Reserve Chairman Chris Waller suggested that the Central Bank may skip a hike in June but is still leaning toward a rate hike in July depending on inflation data.

Equity markets in Europe were mostly down yesterday. Germany’s DAX (DE30) fell by 1.92%, France’s CAC 40 (FR40) lost 1.70% on Wednesday, Spain’s IBEX 35 (ES35) was down 1.14%, Britain’s FTSE 100 (UK100) closed negative 1.75% yesterday.

Germany’s leading indicator, the Ifo index, fell from 93.6 to 91.7 for the first time after a six-month rise. The first drop in the Ifo index in six months is evidence of fading optimism. Recent bank turmoil appears to have caught up with German company valuations. The report indicates that falling purchasing power, a shrinking industrial order book, and the impact of the most aggressive monetary policy tightening in decades will lead to weak economic activity in the region. In addition to these cyclical factors, the ongoing war in Ukraine, demographic changes, and the ongoing energy transition will put structural pressure on the German economy in the coming months.

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The UK Consumer Price Index fell from 10.1% to 8.7% (forecast 8.2%) y/y. But core inflation (excluding food and energy prices) unexpectedly rose from 6.2% to 6.8% y/y. As a result, overall inflation declined, but inflationary pressures remain persistent in key sectors. In this situation, the British Central Bank has no choice but to keep raising rates.

WTI crude oil jumped over 2% yesterday after an excessive weekly drop in US crude inventories. Oil demand is rising in anticipation of road, air, and sea transportation in the summer, which is usually accompanied by an increase in the price of “black gold”.

Asian markets were also mostly down yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.89%, China’s FTSE China A50 (CHA50) lost 1.50%, Hong Kong’s Hang Seng (HK50) ended the day down 1.62%, India’s NIFTY 50 (IND50) added 0.34%, while Australia’s S&P/ASX 200 (AU200) ended Wednesday negative 0.63%.

NVIDIA Corporation (NVDA) rose sharply yesterday after the video card maker beat expectations for its first-quarter earnings and projected higher revenue due to strong demand from artificial intelligence development. Nvidia’s positive outlook improved the outlook for the chip-making sector, with Southeast Asia a major region.

Concerns about a new wave of COVID in China hit regional stocks. The Chinese government has warned that a new outbreak could peak by the end of June. Although symptoms of a new variant of COVID are mild, markets fear further disruptions to China’s economic recovery.

S&P 500 (F) (US500) 4,115.24 −30.34 (−0.73%)

Dow Jones (US30)32,799.92 −255.59 (−0.77%)

DAX (DE40) 15,842.13 −310.73 (−1.92%)

FTSE 100 (UK100) 7,627.10 −135.85 (−1.75%)

USD Index 103.89 +0.40 +0.39%

Important events for today:

– German GDP (q/q) at 09:00 (GMT+3);
– US GDP (q/q) at 15:30 (GMT+3);
– US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
– US Pending Home Sales (m/m) at 17:00 (GMT+3);
– US Natural Gas Storage (w/w) at 17:30 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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Negotiations on the US debt ceiling are deadlocked. In Germany, there is a drop in business optimism