United States (U.S.) stocks mostly took a dive ahead of a crucial meeting between U.S, President Joe Biden and Republican House Speaker Kevin
McCarthy to iron out road blocks in debt-ceiling negotiations. The meeting on Monday has since hit major stumbling block with no clear conclusions made.
CGSCIMB cited that the S&P 500 drifted between gains and losses. Yields on short-term Treasuries rose and the tech-heavy Nasdaq 100 advanced, though chipmakers were under pressure. China said products by Micron Technology Inc. failed a cybersecurity review.
Meanwhile, Pfizer Inc. rose on a report its weight loss pill may be as effective as Ozempic. And, Zoom Video Communications Inc. was higher in after-hours trading after raising its annual sales forecast.
Treasury Secretary Janet Yellen said the chances are “quite low” that the US can pay all its bills by mid-June. Tech is at least one beneficiary in the meantime. Elyse Ausenbaugh, a global investment strategist at JPMorgan Wealth Management, said mega-cap tech already “went through that phase of retrenching and refocusing their businesses, and so investors are starting to gravitate there.”
The Nasdaq 100 surpassed a 52-week high on Monday.
Meanwhile, the Euro Stoxx 600 was little changed on the day. Commodities were broadly weaker because of concern over China’s post-Covid economic recovery. Iron ore futures dropped on signs of disappointing steel demand from the construction sector.
However, Asian equities ended higher after Biden hinted about improving relations with Beijing. His prediction that Sino-US ties would “begin to thaw very shortly” lifted Hong Kong stocks more than 1%.
Asian equity futures showed small gains while contracts for US benchmarks inched higher as investors awaited word from a crucial meeting between President Joe Biden and Republican House Speaker Kevin McCarthy on the debt ceiling. Stocks in Japan and Hong Kong were poised for early gains Tuesday, with contracts for Australian shares suggesting marginal increases.
Market conditions seem to be fundamentally strong but vigilante of the possible calamity as If the debt crisis roiling Washington were eventually to send the crashing into recession, America’s economy would hardly sink alone.
The repercussions of a first-ever default on the federal debt would quickly reverberate around the world. Orders for Chinese factories that sell electronics to the United States could dry up. Swiss investors who own U.S. Treasurys would suffer losses. Sri Lankan companies could no longer deploy dollars as an alternative to their own dodgy currency.
What does the June 1 (X-Day) debt default mean for the global economy?
Even if the US misses the X-date but continues repaying investors, the consequences of the political failure to reach agreement would likely ripple through global markets.
The government’s inability to pay all its bills “would raise serious doubts about the nation’s creditworthiness, sap the confidence of lenders, call into question the dollar’s place as a reserve currency, and increase federal borrowing costs”, Paul Van de Water from the nonpartisan Center on Budget and Policy Priorities wrote in a recent blog post.
“Under the present circumstances, even the serious threat of a US default could be enough to roil markets and further damage the global economy,” AFP cited him saying.
In the unlikely event of a default, the consequences would be substantial, according to Eric Dor, director of economic studies at IESEG business school in France.
“The interest rates charged by investors on bonds issued by the United States would rise sharply,” as would private debt, which uses US government debt as a benchmark, he said.
“This increase in the cost of credit would cause a drop in business and household investment, as well as in consumption, and thus a sharp recession in the United States,” Dor continued, adding it could also cause a recession in Europe and elsewhere.
“A default would destabilise the global financial system, which depends on the stability of the dollar as the world’s safe asset and primary reserve currency,” Jean Ross from the nonpartisan Center for American Progress wrote in a recent article.
“A loss of confidence in the dollar could have far reaching economic and foreign policy ramifications, as other countries, particularly China, would use default to push for their currency to serve as the foundation of global trade,” she said.
Downgrading U.S. debt?
As the X-date (June 1) draws closer, investors are nervously watching the ratings agencies for signs of a possible downgrade to US debt.
This last happened back in 2011, when a similar debt ceiling stand-off led ratings agency S&P to lower its US credit rating from AAA to AA+, drawing bipartisan outrage.
Even if the United States hits the debt ceiling but continues paying its bills, the rating agencies will likely take note, according to Nathan Sheets from Citi, underscoring the need for a negotiated agreement ahead of time.
“Debates about whether or not you pay occurring periodically is typically not a feature that you would associate with a top credit” rating, he said
