The U.S. debt ceiling continues to be a cause for concern as there is still no progress with a week remaining until the “X-date” when the U.S. runs out of money. However, the stock market has a mixed tone this morning. This is due to chipmaker Nvidia (NASDAQ:) publishing an earnings report that far exceeded expectations and making a booming forecast. This sent shares soaring by nearly 30%, reflecting the excitement surrounding the use of artificial intelligence (AI), which could increase the demand for chips.
Despite the excitement around Nvidia, there is less enthusiasm about the debt ceiling negotiations that resumed yesterday. Fitch Ratings have put the U.S. AAA long-term foreign-currency issuer default rating on negative watch, as the ongoing debt ceiling negotiations have increased the risk of the government missing payments on its obligations. However, Fitch still expects the matter to be resolved before the X-date.
However, the market’s concerns are reflected in the short-term Treasury yields, which are at their highest levels in over two months. Investors are not keen to own these assets while it remains unclear whether they will be paid on time, or at all, should the U.S. default.
Although a default still seems unlikely, the process of reaching an agreement and getting it through Congress quickly with the Memorial Day break looming may be challenging. Some analysts suggest that the Treasury Department’s June 1 deadline may be more flexible than the government admits. However, going beyond that date without an agreement would further shake Wall Street.
In light of all these factors, it is not surprising that there has been a sharp rise in volatility this week from recent lows. When volatility rises, it implies sharper potential moves each day on Wall Street.
- The rose by 2 basis points to 3.74%.
- The reached 104 for the first time since March 1, reflecting investor’s flight to perceived safety.
- The Cboe Volatility Index futures eased to 18.95 after topping 20 yesterday.
- WTI Crude Oil fell to $72.94 per barrel after Russia downplayed the prospect of further OPEC+ production cuts in early June’s OPEC meeting.
Despite most risk assets stepping back on Wednesday, the index escaped that trend, and front-month /CL futures achieved three-week highs above $74. This happened even as (copper) plummeted to new six-month lows amid concerns about industrial demand.
While all commodities are vulnerable if the global economy hiccups due to a potential U.S. default, crude continues to march to its own drummer, mainly because of supply concerns. Another production cut is expected from an OPEC meeting at the start of June following the surprise cut back in March.
Data just out looks strong, indicating the Federal Reserve might not pause rate hikes in June as weekly jobless claims were below expectations at 229,000. Moreover, the government revised the prior week’s claims down to 225,000 from the previous 242,000. Some Wall Street analysts were expecting claims of 247,000, and the weekly figure had surpassed 260,000 earlier this month. This information signals that the job market is still holding up.
The government also raised its estimate for quarterly Gross Domestic Product (GDP) growth to 1.3% from the initial 1.1%.
Stocks in the Spotlight
Good news has been challenging to find on Wall Street lately between debt ceiling issues, wobbly earnings from many retailers, and Federal Reserve hawkishness. Therefore