May 22 REX Wire Market Outlook

Markets remain in a holding pattern until the US debt ceiling issue can be resolved.

May 22 REX Wire Market Outlook

Markets are holding their breath as talks on the US debt ceiling are set to resume this week. While there have been reports of constructive conversations, each side still ultimately views the other's stated position as unacceptable. Republicans cannot countenance an ever-increasing debt burden (and crippling interest payments), while Democrats cannot agree to the level of spending cuts demanded by Republicans to key areas.

Few experts believe the US will default on its debt, which would be catastrophic for both domestic and global economies/markets. The market is pricing in a small but real possibility of default, though likely only a temporary glitch; this is, after all, not a structural issue with the US economy, but a political problem, and the solution will be political. Yields on one-month T-bills are 5.4%, but just over 5.2% for three-month treasuries: Traders are betting that within three months, the risk will be lower than it is today.

Yield curve chart from
Treasury yields are indicating reduced risk is expected for 2-3 months' time.

However, time is running out. Treasury Secretary Janet Yellen has reiterated her warning that June 1 is a "hard deadline", after which the US will be in immediate danger of failing to meet its obligations. There's some debate about this cut-off point. Still, delaying beyond the next 10 days would not be a positive development.

"If it were done when 'tis done, then 'twere well / It were done quickly"
Macbeth, Act I scene 7

Markets Shrug Off Debt, Recession Fears

Despite the US's eleventh-hour wrangling and the possibility of global recession, global stock indices are still extremely bullish. (The stock markets are not a mirror of the economy, of course, and tend to be forward-looking.) The German DAX broke its all-time high on Friday, the UK's FTSE-100 is close to ATH, and the S&P is a little off a one-year high. These gains have partly been driven by tech companies, and the AI narrative is helping. With greater productivity and fewer workers to pay, shareholders will enjoy more profits—though the message for employees is bleaker.

Bitcoin has not seen such gains. However, as a smaller asset that's traded 24/7/365 and is acutely sensitive to risk, it reacts quickly to changing sentiment and may have already priced in present conditions, well before stocks did. BTC is up 62% on the year, and is now trading in a tightening band, moving within a $1,300 range last week as the markets await some clarity around the debt ceiling.

Key levels for BTC remain the same: The 200 WMA (around $26,200), which is now just above the 21-week EMA ($25,600), the traditional bull/bear market line. Below that, $25k, $20k, and $15k are the levels to watch. To the upside, the $28-30k band is strong resistance. Overcoming this would be very positive.

Commodities are trading lower, with oil down 45% from its March 2022 high as the world eyes a recession. This will feed through to inflation, which is still too high for central banks to be complacent. The expectation from the market is currently that interest rates will stay at their current level of 5-5.25% until November, when the Fed will start to lower them. This is a notable shift even from a few weeks ago, when a faster pivot was expected.

Oil chart
Oil has corrected steeply over the last year.

Lastly, despite those expectations of "higher for longer" interest rates, no more banks have collapsed in the last week. It remains to be seen how the Fed's balancing act between inflation and banking failures will work out, and what role that tightrope walk will play in the coming months.

That's all for today!

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