Financial markets could be volatile on Tuesday due to the interim debt ceiling agreement reached by President Biden and Kevin McCarthy, as the deal faces a potential Republican rebellion in the House.
Key points to remember
- Andrew Clyde and Chip Roy have announced their intention to push back on the tentative agreement reached by President Biden and Kevin McCarthy.
- US stock markets could build on Friday’s rally and reverse weeks of exits.
- The White House statement acknowledged that not everyone would get what they wanted when the deal was tentatively reached.
Andrew Clyde and Chip Roy are two Republicans who oppose the deal, citing $4 trillion in additional debt as “none of the major fiscally responsible policies have passed.” Republican Ken Buck said he was “appalled” by a “waiver” of the debt ceiling and an estimated US debt of $35 trillion by 2025.
It is impossible to say for sure how the market will react on Tuesday. A debt ceiling agreement could lead to a strong rally in US stock markets after “massive” outflows during negotiations. Reuters reported that in the week ended May 10, U.S. equity funds suffered outflows worth $5.7 billion, marking a seventh consecutive week of outflows. In the week to May 24, global money market funds received about $17.6 billion in inflows, the largest in three weeks as investors fled to overseas markets. Credit rating agencies have put the US on watch for a possible downgrade ahead of the weekend.
The tentative agreement to raise the debt ceiling by $3.14 trillion for two years would mean further negotiations would not take place until after the 2024 election. Under the terms of the deal, spending Non-military would be flat in fiscal 2024 and grow 1% in 2025. McCarthy said the deal would be “transformational” and make the country stronger. Biden acknowledged, “The deal represents a compromise, which means not everyone gets what they want.”
Treasury Secretary Janet Yellen has warned that failure to reach an agreement could lead to “economic chaos” with the government unable to pay its bills as early as June 5.
Maya MacGuineas, Chair of the Committee for a Responsible Federal Budget, said, “We cannot fail. That would be beyond stupid. We could create a recession here. We could create a worldwide recession.
ING Bank’s Carsten Brzeski said a default was the “mother of all crises”, but he also said the US could avoid a technical default for a few weeks by paying bondholders the to the detriment of other budget items, such as social security benefits and health care. . The S&P 500 staged a 1.45% rally on Friday, and if a deal is struck, that could lead to a solid week of gains as spooked investors rush to the US market.