Market snapshot: massive relief for investors after US default avoided

A potentially catastrophic event has been averted, but the outlook for interest rates and the economy remains unclear. Our head of markets has the latest. 

Investor optimism ahead of the Senate vote proved to be well-founded as the debt ceiling issue was resolved, with just days to go, after the closing bell.

While the issue was expected ultimately to reach a satisfactory conclusion, there was nonetheless relief as the legislation avoids what would have been a disastrous US default. Attention will now revert to the other pressing issues of the day, most notably the next move on interest rates from the Federal Reserve.

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Comments from Fed members also lifted sentiment, suggesting that the time for a pause in the rate hiking cycle might now be appropriate. The consensus has swung again to a reported 75% chance that there will be no hike at the upcoming June meeting. However, a strong non-farm payrolls report later today could upset that particular applecart. The current forecast is for 190,000 jobs to have been added in May, as compared to a figure of 253,000 the previous month.

Ahead of the report there were some clues on the labour market from weekly economic readings which showed a modest rise in jobless claims, although less than expected, and more promisingly perhaps that wage inflation was showing signs of slowing. The labour market has been a thorn in the Fed’s side as it continues to attack inflation, although investors remain divided on whether the current strength of the US economy might enable the central bank to engineer a soft landing.

In the meantime, the current themes continue, with the tech-heavy Nasdaq seeing the benefit of ongoing buying interest. In the year to date, the index has added 25% and, while the move has undone some of the damage caused by a torrid performance last year, the Nasdaq is still 18% away from the highs it experienced in November 2021.

The benchmark S&P500, itself with a measurable exposure to technology stocks, has now added 10% so far this year, while the traditional Dow Jones is marginally behind by 0.2%.

Asian markets were the first to have the opportunity to react to the US debt ceiling breakthrough and rallied across the board. In addition, the more recent concerns over an apparently faltering Chinese economic recovery were temporarily swept aside, with the Hang Seng posting its best gains for several months. That move was largely driven by a surge in technology stocks in reaction to the recent strength of their US counterparts.

UK markets also joined the party, opening comfortably higher in early exchanges. The FTSE100 edged ahead, with Prudential (LSE:PRU) enjoying the double whammy of improved Chinese sentiment and a broker upgrade, while the miners also rode the wave on another move to risk-on trading after the Asian market moves.

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Even so, the recently weak performance of the indices, particularly throughout May when the premier index lost over 5%, has left its scars. The FTSE100 is now ahead by just 1% in the year to date, with the FTSE250 up by a marginal 0.5%.

The strength of sterling over recent sessions has been a headwind for those blue chips with a strong exposure to overseas earnings, although by the same token a recovering Chinese economy and a soft economic landing in the US would be strongly positive catalysts over the coming months.