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U.S. debt: Watch out for these warnings before celebrating the deal

Published 29/05/2023, 06:14 pm
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Investing.com - Markets started the week in the green, with the Ibex 35, CAC 40 and DAX buoyed by U.S. President Joe Biden's confirmation on Sunday that he has reached a tentative agreement to raise the debt ceiling with House Republican leader Kevin McCarthy, and that the text is ready to be voted on in Congress.

The agreement would suspend the debt limit until January 1, 2025. This eliminates it as a potential issue in the 2024 presidential election.

Analysts at Link Securities said that welcome the agreement as it will prevent the country from defaulting on its payment commitments, which investors had been fearing.

Stock market reaction

According to the analysts, the fact that both Wall Street and the London Stock Exchange will be closed Monday for local holidays will, however, mean that trading volumes will be very low, in line with what has been happening in recent sessions. They expect, however, that investors will once again bet on risk, in what can be considered a small relief rally, which began on Friday, as it is now very unlikely that the U.S. will default.

Sergio Avila, market analyst at IG agrees, adding that risk appetite has cooled in recent weeks after the rebound from the March lows, and stocks are looking for a catalyst to push them higher.

Link Securities noted that while it is true that the aforementioned agreement must still be ratified by both houses of the U.S. Congress, they expect that, despite opposition from the most radical wings of the Republican and Democratic parties, the necessary majorities will be reached in both the Republican-controlled House of Representatives and the Senate, where the Democrats have a majority, for the bill to reach President Biden later this week for ratification.

Caution

However, some analysts remind us that the deal is not yet closed. Javier Molina, senior market analyst at eToro said that it looks like a deal is close, but it will still have to go through a very divided Congress.

Bankinter analysts added that the differential difficulty with respect to the past is political polarization, with a Republican Congress and a Democratic Senate by razor-thin majorities (222 'vs' 213 and 51 'vs' 49) and presidential elections on Nov. 4, 2024, which means the campaign has already begun in practice.

They further noted that this could delay its formal approval and it is estimated that between June 1 and 5 it will no longer be possible to meet all the committed expenditure without increasing the debt (because the limit applies to the size of the public debt, which on January 19 already reached its authorized maximum).

Link Securities notes that this weekend the Secretary of the Treasury, Janet Yellen, has delayed from June 1 to June 5 the so-called "X" day, after which the U.S. will not be able to meet its payment commitments, which gives greater room for maneuver to the two chambers for the processing of the law.

Bankinter added that although the most serious risk (partial shutdown of the administration and possible default) has been avoided, at least 3 days are needed from the time the text of the agreement is available until it is submitted to a vote in the chambers, so its formal approval will probably take place after the deadline.

(Translated from Spanish)

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