US equities climbed on Wednesday amid optimism over the US debt ceiling as both President Biden and House Speaker Kevin McCarthy expressed confidence that there would be no default and reaching an agreement this week is “doable”.
United States
While President Biden travels to a G7 meeting in Japan, a narrower group of officials will continue negotiations, which Biden has said has the authority to make agreements in detail between the two sides but does not anticipate a deal will be completed prior to returning on Sunday. Several obstacles remain for reaching a deal with Republicans digging in on spending cuts, clawing back unspent COVID-19 funding, easing permits for energy, and expanding work requirements for Federal aid. Meanwhile, Biden has drawn a red line under increasing work requirements for safety net programs providing Americans with health insurance. While both sides continue to signal their willingness for a deal, investors should be unsurprised to see headlines over the coming days and weeks, all of which have the potential to increase volatility. In similar debt ceiling discussions historically, posturing and saber-rattling typically goes down to the 11th hour before a deal is ultimately hashed out to avoid a default.
The S&P500 climbed 1.19% along with the Dow Jones 1.24%, Russell 2000 2.21%, and Nasdaq100 1.22% which reached the highest level since August 2022. However, the bond market continues to price caution, with yields higher across the curve ranging from 7.2 basis points on the 2-year to 3 basis points on the 10-year. Treasury bills expiring on June 1st continue to trade at a significantly higher yield than those expiring on May 30th, trading at 5.34% and 3.51% respectively while 1-year US sovereign debt credit swaps continue to trade near their highs shown on the chart below.
Sovereign 1-year Credit Default Swaps
Europe
European equities were muted as investors await progress on the US debt ceiling with the Euro Stoxx 600 down just -0.15% along with the CAC -0.9% and FTSE100 -0.36% while the DAX rose 0.34%. The final reading of April inflation for the Eurozone showed prices rose 7% as expected over the 12 months, and core prices rose 5.6% also as expected having eased modestly from 5.7% in March. European equities have halted year-to-date gains in May, trading sideways after rallying 10% throughout the start of the year. Analysts at Barclays Plc said it would be “wise tactically” to lock in gains given the strong relative outperformance over US peers but remain overweight European equities citing cheaper valuations.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open higher this morning following Wall Street’s positive lead with ASX200 futures up 40 points or 0.55% to 7,260. The index weakened -0.49% on Wednesday, paring back larger declines of -1.04%. The policy-sensitive 3-year government bond yield rose 3 basis points to 3.14% while the Australian dollar is little changed after Q1 wage growth was modestly higher than forecasts. Over the 12 months to March 2023, wages rose 3.7% from 3.4% previously, slightly above estimates of 3.6% although rose 0.8% over the 3 months, below expectations of 0.9%. With real wages negative after factoring in inflation, the data is unlikely to see the Reserve Bank of Australia shift its outlook for policy meaningfully, although is unlikely to see the bank shift towards easier policy. Financial markets continue to price in monetary policy remaining on hold for the coming months as the RBA assesses incoming data. The central bank will receive further key data today to help inform policy decisions with unemployment data for April due at 11:30 AEDT along with consumer inflation expectations. Economists are forecasting 25k jobs were added over the month with the unemployment rate expected to remain stable at 3.5%.
Australian Wage Growth
Shares in Temple & Webster were a notable performer, climbing 19.05% after reiterating full-year guidance of growth between 3-5% while boasting of year-on-year growth with comparable sales rising 10% over the past four weeks vs the prior period a year earlier. Meanwhile, shares in Incitec Pivot slumped -7.84% after first-half profit was below expectations with the explosives manufacturer blaming weaker fertilizer prices with the fertilizer division’s profit tumbling 58%, somewhat offset by a 42% profit increase in its explosives division.
Commodities
Both WTI and Brent crude are 2.78% and 2.74% higher overnight despite EIA crude oil stockpiles for the week ending May 12th climbing 5.04m barrels vs expectations of a 920k barrel draw. The move higher comes amid comments from Russian President Vladimir Putin that Russia’s production cuts at intended to support global oil prices in line with partners in OPEC+. Iron ore futures in Singapore climbed 2.95% to US$108.14 extending a recent bounce on improved demand from steel mills that have been undeterred by weaker economic data earlier this week. Gold is -0.37% lower overnight at US$1,981 an oz, with silver little changed, and Bitcoin is 1.41% higher at US$27,337 after stablecoin manager Tether said it will invest 15% of realized net operating profits into purchasing Bitcoin.
Economic Calendar
18th May 2023
Australian Employment (MoM Apr) 11:30
ECB Lagarde Speech 19:00
US Initial Jobless Claims (May 13th) 22:30
Fed Jefferson Speech 23:05
US Conference Boarding Leading Index (MoM Apr) 00:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
