A compromise on a debt deal could boost the stock market

NEWS that a compromise has been reached to raise the US debt ceiling could boost the stock market, but investors may choose to remain cautious with lawmakers yet to approve the deal.

The benchmark Philippine Stock Exchange Index (PSEi) lost more than 100 points last week, falling below the resistance level of 6,600 to finish Friday at 6,530.20, down 2.01 percent from a week earlier.

Analysts blame the drop on ongoing concerns over whether the White House and Republican lawmakers can agree on a deal to extend the government’s borrowing power with an approaching June 5 deadline.

On Saturday, US President Joe Biden and Speaker of the House of Representatives Kevin McCarthy announced that a deal had been reached, with lawmakers expected to vote on the deal on Wednesday, US time.

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

Juan Paolo Colet, general manager of China Bank Capital Corp, said: “Investors should expect increased volatility as several factors come into play, including developments in Washington, month-end window dressing and the completion of the MSCI rebalancing. “

“The rise in US stock indices last Friday and growing optimism about US debt limit talks could spur bargain hunting as the PSE opens trading week,” he also said.

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

Senior research analyst Japhet Tantiangco of Philstocks Financial Inc. said the issue of the US debt ceiling will remain front and center.

“Last week saw a bearish local market amid the failure to reach a deal on US debt ceiling negotiations. Amid its bearishness, the market fell below the 6,600 level, as did its 10-day, 50-day and 200 day exponential moving averages,” he noted.

News that the US Treasury Secretary had already moved the “X date” by which the US would hit the current debt ceiling from June 1 to June 5 would also help, Tantiangco said.

Locally, he said investors could take their cues from Thursday’s release of the latest Purchasing Managers’ Index data.

Online brokerage 2TradeAsia.com, meanwhile, said window dressing could boost trading at the end of the month, but warned that the debt ceiling issue meant it could face potential volatility in financial markets.

“On the currency side, there is strong weakness in Asia’s regional currencies against the dollar as uncertainties have driven a small exodus into riskier assets,” 2TradeAsia.com noted.

“Those who remember the 2018 US government shutdown plus the budget dispute should also remember that fearful markets are often tradable markets,” it added.

“Immediate support is 6,300 to 6,400, while resistance is 6,750.”