The two parties in the United States have been unable to reach an agreement on the debt ceiling negotiations, and the impasse has also triggered concerns in the market.
Blackrock warned that the US debt ceiling crisis would exacerbate financial stress triggered by rising interest rates, putting stocks through another bout of volatility and a possible sell-off. The bond market is now more volatile than the last time the U.S. was at risk of defaulting on its debt, when the S&P 500 fell about 17 percent between July and August 2011. Blackrock warned that the current debt ceiling crisis could trigger similar market volatility. The firm recommends overweight emerging market equities, which could benefit in the near term from China's economic restart, central bank tightening coming to an end and a weaker dollar; Underweight developed market stocks is recommended.
According to the latest MLIV Pulse survey, when asked what asset they would buy to hedge their risk if the government hit the debt ceiling and couldn't meet its obligations, the vast majority of respondents chose gold. European investors are more likely to choose gold than US/Canadian investors. Us/Canadian investors surveyed were almost twice as likely to choose US Treasuries (18%) as European investors. There was little difference in opinion on whether U.S. debt would rise (46 percent) or fall (54 percent) in the wake of the crisis. Overall, nearly 70 percent of respondents believe the dollar will fall within a month.
Spot gold rose on Monday, also helped by a weaker dollar and as investors remained wary of the impasse in the U.S. debt ceiling talks, which could deepen concerns about slowing global growth, making gold more affordable for investors holding non-dollar currencies. Han Tan, chief market analyst at Exinity, said: "Lingering concerns over the US debt ceiling negotiations and expectations of the Fed ending its rate hike process are supporting gold above $2,000." Data on Friday showed U.S. consumer confidence fell to a six-month low in May amid concerns that a political battle over raising the federal government's borrowing limit could trigger a recession.
Dutch International said the dollar could rise if U.S. lawmakers fail to make encouraging progress on breaking the debt ceiling impasse. President Joe Biden is expected to meet again Tuesday with congressional leaders on a plan to raise the debt ceiling. Francesco Pesole, a Dutch international analyst, said in a note that unless there is positive news on this front, they believe the balance of risks for the dollar remains tilted to the upside for now, and safe-haven flows should flow into the dollar as market risk sentiment remains subdued. Francesco Pesole said the dollar index DXY could rise to 103.50-104.00 in the coming days.
