Stocks Rise as Hope Grows for U.S. Debt Ceiling Deal, Averting Default

May 18, 2023

Stocks experienced a positive surge as investors remained hopeful that an agreement on the U.S. debt ceiling could be reached between congressional leaders and President Joe Biden, thereby averting a catastrophic default. The Dow Jones Industrial Average rose by 408.63 points or 1.24%, reaching 33,420.77, while the S&P 500 increased by 1.19% to 4,158.77, and the Nasdaq Composite advanced 1.28% to 12,500.57. Following a meeting with Biden, House Speaker Kevin McCarthy stated that progress had been made and a potential deal could be reached by the end of the week. Biden cancelled part of an international trip to focus on the negotiations, expressing confidence in avoiding a default.

Concerns regarding a potential default had been impacting the markets, with the Dow experiencing a 2% decline this month, including a 1% drop on Tuesday. Treasury Secretary Janet Yellen emphasized the immediate need to raise the debt limit, as the country faced the risk of defaulting as early as June 1. The market sentiment improved on Wednesday as regional bank shares rebounded, particularly Western Alliance Bancorp, which reported positive deposit growth. This led to a 10.2% surge in Western Alliance’s stock and a more than 7% increase in the SPDR S&P Regional Bank ETF (KRE), contributing to the overall positive market trend.

Data by Bloomberg

On Wednesday, all sectors experienced an overall positive performance in the market. The financial sector led the gains with a significant increase of 2.09%, followed closely by the energy sector at 2.07%. Consumer discretionary stocks also saw a notable rise of 2.04%, while industrials recorded a gain of 1.70%. Real estate and information technology sectors both contributed to the positive trend, rising by 1.29% and 1.28% respectively. Communication services also saw a modest increase of 1.18%. However, the materials sector showed a relatively lower growth of 0.67%.

In contrast, the health care sector had a marginal gain of 0.10%, while consumer staples experienced a slight decline of -0.10%. The utilities sector saw a relatively larger decrease of -0.36%. Overall, Wednesday’s market performance indicated a broad positive sentiment, particularly driven by strong performances in the financial, energy, and consumer discretionary sectors.

Major Pair Movement

The dollar initially strengthened on Wednesday due to rising Treasury yields but later lost some of its gains as risk-on sentiment increased. The yen was the exception, weakening broadly against the dollar. The Japanese currency fell 0.9% against the dollar as USD/JPY approached key resistance levels.

EUR/USD experienced a rebound from its lows, although it still declined by 0.2%. Market expectations for aggressive rate cuts by the Federal Reserve in the second half of the year decreased, while the European Central Bank’s rate hike expectations remained limited. Concerns over euro zone data and a weaker reopening in China impacted demand prospects. The U.S. inflation rate remained high, and the Federal Reserve is monitoring it closely. Sterling, being more sensitive to risk, recovered to near-flat levels from its recent lows.

In addition to the ongoing U.S. debt ceiling negotiations, Thursday’s focus will be on U.S. initial jobless claims, with a decrease anticipated. The outcome of these claims will impact the dollar. Other key data to be released on Thursday includes the Philly Fed index and existing home sales.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Drops to Monthly Lows Against Dollar Amid ECB Divergence and Rate Hike Uncertainty

On Wednesday, the EUR/USD dropped to monthly lows near 1.0800 but later recovered some losses during the American session. The Euro faced downward pressure due to divergence among European Central Bank (ECB) officials and uncertainty regarding future rate hikes. Eurozone bond yields rose, although US yields outpaced them. Risk sentiment improved, leading to a slight weakening of the US Dollar. The Federal Reserve showed some division on their next course of action, with a 28% chance of a rate hike at the June meeting according to the CME Fed Watch Tool. Mixed US housing data was released, and upcoming data includes Jobless Claims, the Philly Fed index, and Existing Home Sales. While the debt ceiling situation has become less dramatic, a resolution is still pending.

Chart EURUSD by TradingView

According to technical analysis, the EUR/USD pair is currently moving sideways after a downward movement on Wednesday. The price is currently trading between the lower and middle bands of the Bollinger Bands. It is expected that the EUR/USD will make a slight upward move towards the middle band before determining its next direction. The Relative Strength Index (RSI) is currently at 36, indicating an overall bearish trend in the EUR/USD market.

Resistance: 1.0885, 1.0930

Support: 1.0820, 1.0785

XAU/USD (4 Hours)

Gold (XAU/USD) Extends Decline as Dollar Strengthens Despite Positive Market Sentiment

Spot Gold (XAU/USD) experienced a decline, reaching its lowest level for May at $1,974.99 per troy ounce. The XAU/USD pair rebounded slightly after the opening of Wall Street and traded around $1,980. The fall in gold prices was driven by renewed demand for the US Dollar, despite an improved market mood. President Joe Biden and congressional leaders met to discuss extending the debt ceiling, and positive statements from Republican Kevin McCarthy raised hopes of reaching a deal by the end of the week. Asian and European stock markets closed with mixed results, while American markets showed substantial gains, which had a dampening effect on the US Dollar. Federal Reserve officials attempted to downplay the likelihood of a rate cut later in the year, emphasizing that more work needs to be done. Cleveland Fed President Loretta Mester stated that she believes the central bank has not yet reached a point where interest rates can be held steady, as inflation remains persistent. While financial markets have priced in a pause in rate hikes for June and July, Fed members are still discussing whether or not to proceed with the pause.

Chart XAUUSD by TradingView

According to technical analysis, XAU/USD continued to fall on Wednesday, leading to further downward pressure on the lower band of the Bollinger Bands. There is a possibility that XAU/USD may experience an upward movement towards the middle band of the Bollinger Bands. Currently, the Relative Strength Index (RSI) stands at 34, indicating that XAU/USD is in a bearish trend.

Resistance: $1,991, $2,002

Support: $1,974, $1,966

Economic Data