Compromise on debt deal could lift the stock market

NEWS that a compromise has been reached to raise the US debt ceiling may stimulate the stock market, but investors may prefer to be cautious as lawmakers still won’t approve the deal.

The Philippine Stock Exchange’s benchmark index (PSEi) lost over 100 points last week, dropping below the 6600 resistance level to end Friday at 6530.20, down 2.01% from a week earlier.

Analysts blamed the drop on lingering concerns about whether the White House and Republican lawmakers can agree on a deal to extend the government’s borrowing authority with an approaching June 5 deadline.

On Saturday, US President Joe Biden and House Majority Speaker Kevin McCarthy announced an agreement had been reached, and lawmakers are expected to vote on it Wednesday US time.

However, McCarthy has yet to enlist the support of hardline Republicans who oppose compromise on spending cuts. Democrats opposed to any spending caps may also object to the deal.

Juan Paolo Colet, managing director of China Bank Capital Corp, said “investors should expect increased volatility as several factors come into play, including events in Washington, the window dressing at the end of the month and the completion of the MSCI rebalancing.”

“Last Friday’s rally in US stocks and growing optimism over US debt limit talks could spur bargain hunting as the PSE opens the trading week,” he said.

“Positive news on the US debt ceiling will be the most likely catalyst for a market rally that could send our local index well above 6,600.”

Filstox Finance Inc. senior analyst at Japhet Tantiangco said the US debt ceiling issue will remain in focus.

“Last week, we saw a bearish local market amid the lack of a deal on negotiations on the US debt ceiling. Amid this bearish sentiment, the market fell below the 6600 level, as well as its 10-, 50- and 200-day exponential gains. moving averages,” he said.

Also helping, Tantiangco said, is the news that the US Treasury Secretary has pushed back the “X-date” — when the US hits its current debt limit — to June 5 from June 1.

At the local level, he said, investors can take a look at Thursday’s latest Purchasing Managers’ Index data.

Meanwhile, online brokerage 2TradeAsia.com said late-month showcases could encourage trading, but warned that the debt ceiling issue meant the need to fight possible financial market volatility.

“In terms of exchange rates, regional currencies in Asia fell sharply against the US dollar as uncertainty caused a small outflow of riskier assets,” notes 2TradeAsia.com.

“Those who remember the 2018 US government shutdown and budget dispute should also remember that dangerous markets are often markets that can be traded,” he added.

“Immediate support is at 6300 to 6400 and resistance is at 6750.”