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Stocks Feel the Pain of US Spending Levels Dispute

Miguel A. Rodriguez
Miguel A. Rodriguez
30 May 2023

In the US Democrats and Republicans seem to be here nor there when it comes to reaching an agreement on the debt ceiling. With uncertainty in the market once again mounting, North American and European stock indices were dragged down yesterday. 

Yesterday, US equities fell more as debt ceiling negotiations carried on without a breakthrough. Investors have been waiting for a resolution to the debt ceiling negotiations' deadlock, but it seems they have some more waiting to do. 

The beginning of June is the deadline by which the US government might go into default, meaning it would be unable to fulfil a significant portion of its debt commitments. However, some, including certain Republican negotiators, believe that the date may be moved to later. 

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The government runs the risk of defaulting on its commitments if congress does not raise or suspend the debt ceiling, which could destabilise the financial system and seriously harm the economy. There is no precedent for this situation, but the inevitable credit rating downgrade of North American debt that it would bring about would result in sharp drops in Treasury bonds and stock market crashes, with Investment Banks like Nomura estimating that they would exceed 20%. 

Though the two parties still appear to be far apart, Democrats and Republicans are attempting to iron out specifics on spending levels as part of striking an agreement. Additionally, the calendar does not list any close scheduled meetings. 

Because of everything mentioned above and the general high level of uncertainty, all North Amercian stock indices declined by more than 1% yesterday, bringing down the European indices with them. 

The German DAX threatened to finish below the 15,800-support level yesterday, which from a technical standpoint could open the door to further losses as the market closed yesterday with a 1.5% drop. 

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Fundamental economic data that would normally be the focus of market interest is overshadowed by worries about how the debt ceiling negotiations are progressing. The Federal Reserve's favored inflation indicator, Personal Consumption Expenditure, which will be crucial in the approaching monetary policy decisions, is one of the most important fundamental statistics and will be released tomorrow. 

graph 25.05.2023.png

Sources: Bloomberg, Reuters 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.