Political disputes over raising the US debt ceiling could trigger a recession

By JustMarkets

At the closing of the stock market on Friday, Dow Jones Index (US30) decreased by 0.03% (-0.23% for the week), and S&P 500 (US500) fell by 0.16% (-0.31% for the week). The Technology Index NASDAQ (US100) lost 0.32% on Friday (+0.43% for the week). Friday’s data, which showed a sharper-than-expected drop in consumer sentiment in the United States, heightened fears that the political debate over raising the debt ceiling could trigger a recession. Republicans are pushing for steep spending cuts in exchange for raising the debt ceiling, while Democrats are pointing out that the debt ceiling is not an appropriate vehicle for budget changes.

The Congressional Budget Office warned late last week that the US would face a significant risk of default during the first two weeks of June if lawmakers do not raise the debt ceiling the country is legally allowed to incur. Negotiations between US President Joe Biden and top lawmakers to raise the $31.4 trillion debt ceiling are scheduled to resume early this week. Analysts at JPMorgan believe there is unwarranted panic in the markets, and politicians will not default but point out that, statistically, volatility in financial markets at a time like this is increasing.

Equity markets in Europe mostly rose on Friday. German DAX (DE30) gained 0.50% (-0.34% for the week), French CAC 40 (FR40) added 0.45% (-0.18% for the week), Spanish IBEX 35 (ES35) increased by 0.56% (+0.78% for the week), British FTSE 100 (UK100) close up by 0.31% (+0.67% for the week).

With underlying inflation in the Eurozone remaining steady, there is no doubt that the ECB will continue to raise rates. Europe’s central bank has already raised interest rates by 375 basis points in the current tightening cycle and is expected to raise them another 50 basis points in two quarter-point steps in June and July.

Oil prices fell more than 1% Friday, falling for the third straight week because of a stronger dollar and fears of weak demand due to weak data from China. Data from Beijing last week showed that China’s consumer inflation barely rose in April, while producer inflation fell to its lowest level since the pandemic peak in 2020. China’s trade data is also disappointing, with imports down 1.4% and exports up 8.5%. This is evidence that the economy is recovering unevenly, which could hit demand.

Gold gained momentum on Friday. The trigger for gold’s rise now is investor concern about the impasse over the US government debt hike. Investors are looking for safe-haven assets, which tend to be gold, the US dollar, and the Swiss franc. And the medium-term outlook for gold remains bullish. Historically, once the Fed officially pushes the pause button, nominal government bond yields begin to fall over the next few months. And that tends to drive up the price of precious metals, especially if rates fall further.

Turkish President Tayyip Erdogan beat his opposition rival Kemal Kilicdaroglu in Sunday’s election (49% to 45%) but failed to win an absolute majority to extend his 20-year rule. Neither Erdogan nor Kilicdaroglu passed the 50% barrier needed to avoid a second round, which is due in the May 28 elections.

Asian markets traded unevenly last week. Japan’s Nikkei 225 (JP225) gained 1.01% over the week, China’s FTSE China A50 (CHA50) fell by 1.76% over the week, Hong Kong’s Hang Seng (HK50) lost 2.49% over the week, India’s NIFTY 50 (IND50) gained 0.75%, and Australia’s S&P/ASX 200 (AU200) was up by 0.51% over the week.

In the commodities market, futures on natural gas (+6.6%), gasoline (+2.14%), and lumber (+2.1%) showed the biggest gains last week. Futures on orange juice (-9.54%), silver (-6.94%), cotton (-4.22%), copper (-4.06%), wheat (-3.79%), coffee (-2.92%) and corn (-2.22%) showed the biggest declines.

S&P 500 (F) (US500) 4,124.08 −6.54 (−0.16%)

Dow Jones (US30)33,300.62 −8.89 (−0.027%)

DAX (DE40) 15,913.82 +78.91 (+0.50%)

FTSE 100 (UK100) 7,754.62 +24.04 (+0.31%)

USD Index 102.71 +0.65 +0.63%

• – Japan Producer Price Index (m/m) at 02:50 (GMT+3);
• – Switzerland Producer Price Index (m/m) at 09:30 (GMT+3);
• – Eurozone EU Economic Forecasts at 12:00 (GMT+3);
• – Eurozone Industrial Production (m/m) at 12:00 (GMT+3);
• – US NY Empire State Manufacturing Index (m/m) at 15:30 (GMT+3);
• – US FOMC Member Kashkari Speaks at 16:15 (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.