Fundamental Analysis

Equities Plunge Amid No Breakthrough on US Debt Talks

  • Investor concerns heightened due to the lack of progress in US debt limit negotiations.
  • Investors eagerly await the Federal Reserve’s meeting minutes.
  • Business growth in the Eurozone remained resilient in May.

US equities experienced a significant decline on Tuesday, and short-term Treasury yields surged as investor concerns heightened due to the lack of progress in US debt limit negotiations.

Representatives from President Joe Biden’s administration and congressional Republicans concluded another round of talks on the debt ceiling on Tuesday. The deadline to raise the government’s borrowing limit of $31.4 trillion or face the risk of default is approaching.

Morgan Stanley’s equity strategist, Michael Wilson, noted that a US debt default had not been factored into the market. He also mentioned that even if a deal is reached between the two sides, it could still affect economic growth.

The worries surrounding the debt limit caused yields on one-month Treasury bills to reach record highs at 5.888%. Additionally, investors eagerly await the release of the Federal Reserve’s meeting minutes from May 2-3, scheduled for Wednesday. The minutes will provide insights into the central bank’s potential future actions regarding interest rates.

On Monday, regional Federal Reserve Presidents James Bullard and Neel Kashkari indicated that the US central bank might need to continue raising rates if inflation remains high.

According to a Reuters poll of strategists, the S&P 500 is expected to finish the year at 4,150 points, slightly lower than Monday’s closing value of 4,192.63.

Elsewhere, S&P Global data indicated that US business activity in May reached a 13-month high, primarily driven by growth in the services sector. This report indicates that the economy maintained momentum early in the second quarter, despite increasing recession risks.

Additionally, the Commerce Department is set to release the April reading of the Personal Consumption Expenditure (PCE) Index, the Federal Reserve’s preferred measure of inflation, on Friday.

European shares experienced a decline on Tuesday, primarily influenced by losses in luxury companies and a disappointing update from Swiss wealth manager Julius Baer. Investors remained cautious about economic data from the region and the deadlock over the US debt ceiling.

Eurozone PMI data (Source: SP Global Hamburg Commercial Bank)
Eurozone PMI data (Source: SP Global Hamburg Commercial Bank)

Additionally, data indicated that business growth in the Eurozone remained resilient in May, beating forecasts, but slightly slowed down. The dominant services industry within the bloc experienced a minor loss of momentum while the manufacturing sector’s downturn deepened.