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Chump Profit Early Brief: Risk Appetite Soars as US Debt Ceiling Deal Boosts Markets

The US dollar has eased as hopes of a deal over the US debt ceiling lifted risk sentiment. Treasuries and US stock futures advanced as Congress showed signs of passing a debt-accord to prevent a default. The White House and Republican congressional leaders have increased their lobbying efforts in support of the agreement.

Following the Memorial Day holiday, near-maturity Treasury bills rallied in Asian trading on Tuesday. Additionally, Treasury yields declined across the board for debt dated from five years to 30 years.

However, time is running out as proponents of the deal have just one week to push it through Congress before a potential default on June 5, which could have severe consequences for global markets. President Joe Biden has personally reached out to lawmakers to garner support for the bill, and a House vote is expected on Wednesday before it moves to the Senate.

In response to the positive developments, S&P 500 and Nasdaq 100 futures rose by 0.3% and 0.4% respectively. European futures also saw modest gains, while Asian equity markets had a mixed performance with Japanese shares down and Australian shares relatively unchanged.

The US dollar weakened against major currencies on Tuesday, albeit not significantly, following the news of the debt ceiling deal that improved risk sentiment. The dollar index, which measures the currency against six major peers, dipped 0.125% to 104.17, stepping back from its two-month high of 104.42 reached on Friday. The index is set to end the month with a 2.5% gain.

A few hard-right Republican lawmakers voiced their opposition to the deal to raise the US debt ceiling on Monday. Their resistance underscores the challenges that President Biden and top Republican Kevin McCarthy will face in getting the package approved by the Republican-controlled House of Representatives and the Democratic-controlled Senate before the deadline, likely by next Monday.

Marc Chandler, chief market strategist at Bannockburn Global Forex, described the situation as a game of chicken between the two political parties, with each daring the other to concede. However, Chandler noted that a higher debt ceiling and some spending reduction in the FY24 budget would represent a middle ground.

The 99-page bill, which is expected to be voted on by the House on Wednesday, would suspend the debt limit until January 1, 2025, allowing lawmakers to defer the politically sensitive issue until after the November 2024 presidential election. The bill would also impose caps on government spending over the next two years.

US Treasury Secretary Janet Yellen has warned that the government would default if Congress doesn't raise the debt ceiling by June 5. She had previously indicated that a default could occur as early as June 1.

Currency strategist Carol Kong from the Commonwealth Bank of Australia stated that uncertainty surrounding a potential US government default would likely persist until Congress enacts the deal into law. Kong also mentioned that expectations of future Federal Reserve rate hikes would likely support the dollar in the near term.

Criticism has emerged from environmentalists, defense hawks, and conservative hard-liners regarding concessions made by President Biden and Republican House Speaker Kevin McCarthy to reach an agreement on the debt ceiling. Biden's personal outreach to lawmakers aims to secure support for the bill.

When Federal Reserve policymakers meet in June, the details of the debt ceiling deal will factor into their considerations. Win Thin, global head of currency strategy at Brown Brothers Harriman & Co., wrote in a note that the deal solidifies a 25 basis point hike at the June 13-14 Federal Open Market Committee (FOMC) meeting. Thin added that the potential default was the only thing that could have prevented a rate hike, and the deal effectively eliminates expectations of rate cuts by the end of the year.

Assuming the deal is approved by Congress, the Treasury Department may soon replenish its cash balance and sell over $1 trillion in bills through the end of the third quarter, according to estimates.

Vishwanath Tirupattur, chief fixed income strategist at Morgan Stanley, highlighted the potential for a liquidity drain in the system that could have negative implications for risk markets. He expressed this concern on Bloomberg Television.

In the commodities market, oil prices rose while gold remained steady.

Market expectations are currently pricing in a 60% chance of a 25 basis point hike in June, compared to a 26% chance the previous week, according to the CME FedWatch tool.

In Asian trading, longer-dated US Treasuries rallied on Tuesday following news of the debt ceiling deal. Benchmark 10-year yields dropped by 6 basis points in Tokyo to 3.7596%, while 30-year yields fell by 5.5 bps to 3.9207%. Bond prices rise as yields fall.

Meanwhile, the euro edged up by 0.09% to $1.0715, and the British pound was trading at $1.2365, up 0.11% for the day.

The Japanese yen strengthened by 0.28% to 140.06 per dollar, bouncing back from a six-month low of 140.91 per dollar reached on Monday.

Carol Kong from the Commonwealth Bank of Australia noted that the yen was being weighed down by optimism surrounding the avoidance of a US default. However, a significant surge in the dollar/yen exchange rate could prompt action from Japanese authorities.

The Australian dollar rose by 0.14% to $0.655, while the New Zealand dollar increased by 0.08% to $0.606.

Following President Tayyip Erdogan's victory in Turkey's presidential election on Sunday, the Turkish lira continued to weaken and reached a record low of 20.16 per dollar.

Key events to watch this week include Eurozone economic confidence and consumer confidence data, as well as US consumer confidence figures. Richmond Fed President Thomas Barkin will also be interviewed by NABE as part of a monetary policy webinar series.

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