U.S. stocks suffer as debt ceiling deadlock continues

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25th May 2023 – (New York) On Wednesday, May 24th, U.S. stocks suffered another day of losses as the debt ceiling deadlock continued, renewing fears of a catastrophic U.S. default. The Dow Jones Industrial Average fell by 255.59 points, or 0.77 percent, to 32,799.92. The S&P 500 also fell by 30.34 points, or 0.73 percent, to 4,115.24, while the Nasdaq Composite Index shed 76.08 points, or 0.61 percent, to 12,484.16.

The fall in U.S. stocks on Wednesday extended Tuesday’s selloff, as lawmakers struggled to reach a compromise on the nation’s debt ceiling. Ten of the 11 primary S&P 500 sectors ended in the red, with real estate and financials leading the laggards by losing 2.21 percent and 1.31 percent, respectively. Energy was the only sector that bucked the trend by rising 0.52 percent.

The debt ceiling is a limit on the total amount of debt the U.S. government can issue. The current debt ceiling was reinstated on 1st August, 2019, at $22 trillion, and the Treasury Department has been using various “extraordinary measures” to continue borrowing money since 1st March, 2021, when the previous suspension of the debt ceiling expired. If the debt ceiling is not raised or suspended, the U.S. government risks defaulting on its debt obligations, which would have severe consequences for the global economy.

House Speaker Kevin McCarthy stated on Wednesday that negotiators remained at odds on spending caps, and he blamed his Democratic counterparts for the current impasse. However, McCarthy also expressed hope that both sides could make progress and get a deal to avert default.

Investors are worried, and stock markets are down while safe-haven assets are higher, according to Kenny Fisher, senior market analyst at OANDA, a supplier of online multi-asset trading services. Fisher also stated that Congress has always reached a deal before the deadline, but the current situation remains uncertain.

Failure to reach a debt ceiling deal may have a devastating effect, said Nouriel Roubini, chairman of Roubini Macro Associates, in an interview with Bloomberg on Wednesday. Roubini warned that they may get to the last hour before an agreement, and it’s possible they don’t reach an agreement, which would cause the market to crash.

U.S. Treasury Secretary Janet Yellen stated on Wednesday that it is almost certain the Treasury will run out of resources in early June. She also warned that there could be financial pain even with a debt agreement, and “we are seeing just the beginnings of it.”

Investors also paid close attention to the minutes of the Federal Reserve‘s May meeting released on Wednesday. The minutes showed policymakers were divided over whetherthe central bank should hike interest rates again in June, with some of them seeing the need for more increases while others expected more hikes may not be needed.

The latest minutes indicated that a decision to hike interest rates in the upcoming monetary policy meeting in June would ultimately be data-dependent. The Federal Open Market Committee has over a 30 percent probability of raising federal fund rates by another 25 basis points in June, data from the CME FedWatch Tool indicated Wednesday afternoon.

The ongoing deadlock over the debt ceiling has been a major concern for investors, as it threatens to destabilise the global economy. The U.S. government risks defaulting on its debt obligations if the debt ceiling is not raised or suspended, which would have far-reaching consequences for financial markets and the broader economy.