VIX risk index rises, Gold unchanged, Nadaq 100 off recent highs

The S&P 500 and Nasdaq 100 were off in morning trade, as debt ceiling talks have yet to produce much progress, despite all the positive rhetoric coming from both sides. The Ukraine war looks to be hotting up, with the risk that commodity prices (and so inflation) will spike. Interestingly, the VIX, Wall Street’s fear index, is creeping up and Gold prices, another risk indicator, were unchanged after recent selling.

TODAY’S MAJOR NEWS

Debt ceiling deal still elusive as June 1 deadline looms

A deal to avert a debt ceiling crisis remains elusive, with Treasury Secretary Janet Yellen stating that she can maneuver funds around to avoid default for another 8 or 9 days, but that’s it. The two sides remain far apart, with President Biden wanting to increase taxes on the wealthy, on oil companies and on pharmaceutical companies to reduce the deficit; the Republican-controlled House is asking for reductions in spending growth. The White House reportedly offered to freeze spending at 2023 levels in the 2024 fiscal budget, while Republicans are wanting to pull back unused Covid funds and to freeze spending at 2022 levels that were still elevated due to Covid.

It’s not a surprise that there is not yet a deal, because each side has the highest leverage just before the deadline, but that’s also playing with fire – most notably that we could see the US credit rating cut before we ever get to the deadline due to the impasse. That alone would increase interest rates for both federal and private debt, taking as much as 0.5 percentage points off gross domestic product, and adding to inflation.

Any deal that is reached must pass the Republican controlled House where they hold just a 9-member advantage, as well as the Democratic controlled Senate where they hold a 2-vote advantage. As such, any compromise that is reached must appeal to the middle, and very little middle exists in today’s political world. Therein lies the risk as the calendar counts down to a June 1st deadline.

Bottom line – risk-off

Financial markets are swinging back and forth in risk terms, with the pendulum moving between a debt ceiling agreement (risk-on) or nothing (risk-off). As we approach the June 1 deadline, with no deal, risk-off and weaker markets loom

Economic Data

• Global activity remains strong
• S&P Global's flash US composite Purchasing Manager’s Index (PMI), which captures activity in both the services and manufacturing sectors, was 54.5 in May, ahead of an estimated reading of 53.0 and up from 53.4 in April – a 13-month gain for the index
• Housing market strength persists
• New single-family home sales rose 4.1% in April to an annualized pace of 683,000 up from consensus rate of 669,000

TODAY’S MAJOR MARKETS

Equity markets

• The S&P 500 and Nasdaq 100 were off 0.7% and 0.8%, respectively, after lunch. The more broadly-based Russell 2000 was unchanged
• The KBW Regional Bank Index rose 2.4%, extending last week’s rally, helped by PacWest’s sale of a $2.6 billion property-loan portfolio to Kennedy-Wilson Holdings
• The DAX and FTSE 100 and were off 0.4% and unchanged, respectively
• The VIX, Wall Street’s fear index, rose 5.5% to 18.2, indicating growing investor unease

Currencies and Bonds

• The dollar index was up 0.3%, while Euro/Dollar and Dollar/Sterling were down 0.3% and 0.1%, respectively
• Yields on 2- and 10-year Treasuries rose modestly to 4.37% and 3.72%

Commodities

• Gold prices found support and were unchanged at $1,976 per ounce
• Crude oil prices rose 1.7% to $713.3 per barrel
• The grain and oilseed complex mixed to higher as well

Ukraine War hots up, commodity prices could spike

• Demand for commodities relative to supply is currently soft, but that supply could change quickly amid rising geopolitical risks – and prices might spike
• Ukraine is mobilizing for a major fightback, just as Russia claims its first major victory in 10 months by capturing Bakhmut in the east
• Ukranian-based fighters, a Russian rebel group intent on overthrowing President Vladimir Putin, crossed the Russian border for the first time and attacked the town of Graivoron
• Ukraine also received more aid from G-7 last week, including F-16 fighter jets that have the capability of flying deep into Russia
• The G-7’s gift of the F-16s comes with a requirement that they not be used to cross the border into Russia, but some military experts believe that this won’t be enforced

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com