Equities Advance on US Debt Ceiling Optimism

Global equity markets made solid gains last week on growing expectations that US lawmakers would reach an agreement over a debt ceiling extension. As negotiations rumbled on throughout the week, both President Biden and Republican House Speaker Kevin McCarthy signalled much needed progress ahead of the looming deadline[1]. The Treasury Department has warned the US will go into default from the 1st of June, restricting its ability to pay its bills which in turn would plunge financial markets into chaos. But it does appear that there is a growing likelihood that a deal will be agreed despite all of the posturing that we have seen from both sides over the past few weeks.

The S&P500 rose by +1.7%, reflective of further gains amongst the technology sector constituents, particularly those within the semiconductor space. Treasury yields also jumped, the 10-year yield in particular rising by 25 basis points (bps) to 3.71% on the back of several solid economic data releases. In Europe, the MSCI ex UK index added +0.8% despite further signs of growing weakness in the manufacturing sector whilst across the Channel, the FTSE100 was flat. Sovereign yields both in the UK and on the Continent meanwhile tracked their American equivalents higher with the 10-year gilt yield increasing by 21bps and the 10-year Eurozone benchmark by 16bps to conclude the week at 4.00% and 2.43% respectively. It was a good week for Japanese equities where the Nikkei 225 jumped by +4.8%, buoyed by a combination a impressive corporate earnings and strong buying by foreign investors. The Shanghai Composite in China rose by +0.3%.

Moving to commodity markets, oil prices recorded their first weekly gain for a month. Brent crude rose by +2.0% to $75.64 a barrel with sentiment benefitting from the advancement in debt ceiling negotiations in the US. As for gold, the precious metal slipped by -2.1% to $1,967 an ounce on the back of a bout of strength in the US Dollar[2].

Week Ahead

Flash Purchasing Manager Indices (PMI’s) covering the first three weeks of May are released in both the Eurozone and the UK this week. Other key domestic figures to keep an eye include CPI inflation which is expected to have slowed by nearly 2 percentage points to 8.2% during April, as well as monthly retail sales and government borrowing. Moving to the US, revised Q1’23 GDP is due on Thursday with the rate of expansion expected to be unchanged from the previously calculated +1.1% quarterly figure. New and pending home sales are also published throughout the week. In Asia, the Bank of Japan releases its preferred measure of Core Inflation on Tuesday whilst in China, there are no key figures due on this occasion[3].

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[1] T. Rowe Price, 22/05/23

[2] Refinitiv, 22/05/23

[3] Forex Factory, 22/05/23

SJP Approved 22/05/23