{"id":190918,"date":"2023-05-24T13:00:00","date_gmt":"2023-05-24T17:00:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=190918"},"modified":"2023-05-24T13:01:48","modified_gmt":"2023-05-24T17:01:48","slug":"investor-pessimism-grows-without-a-debt-ceiling-deal-boosting-volatility-may-24-2023","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/investor-pessimism-grows-without-a-debt-ceiling-deal-boosting-volatility-may-24-2023\/","title":{"rendered":"Investor Pessimism Grows Without a Debt Ceiling Deal, Boosting Volatility: May 24, 2023"},"content":{"rendered":"\n

Equities are down for the third consecutive day as investors grow increasingly worried about continued brinkmanship in Washington over raising the debt ceiling. With just eight short days until the June 1 deadline recognized by Secretary of the Treasury Janet Yellen as the point at which the U.S. would default on debt, meaningful progress on reaching a deal has been hard to come by for negotiations. While leaders from both parties have at times attempted to strike a positive tone by calling talks productive and effective, an actual agreement that will spare investors\u2019 from further pain is no where to be found.<\/p>\n\n\n\n

Rather than increasing spending in the next budget, Democratic President Joe Biden has proposed a spending freeze and limits on future fiscal-year spending increases, while Republican House Speaker Kevin McCarthy has emphasized that spending in the coming years must be reduced significantly. In the meantime, Republican plans to cut spending will likely lead to a sharper downturn in the second half of this year as the economy transitions from a period of robust fiscal spending towards austerity. Republicans, for their part, believe spending must be reduced to address the country\u2019s growing debt, which they believe is unsustainable at $31.4 trillion. McCarthy continues to reference the budget health of a typical household when speaking to negotiators and the public, as he emphasizes that the nation needs to move towards a balanced budget, where revenues and expenses shift into improved alignment.<\/p>\n\n\n\n

Equities are down for the third consecutive day, as a failure to strike a deal will lead to an immediate recession. Investor pessimism is propping up volatility as traders pile on wagers to protect against potential downside with the Volatility Index (VIX) up 10.7% to 20.51. All major U.S. equity indexes are down close to 1% as the S&P 500 Index attempts to remain above meaningful support at the 4100 level; the Index is currently at 4118 as buyers took a stand, propelling it off this morning\u2019s low of 4106. Bond yields are modestly higher across the board, led by debt ceiling fears and expectations of a tighter Fed with investors placing the odds of a 25-basis point (bp) hike at next month\u2019s meeting rising to 32%. The 2-year Treasury yield is up 3 bps to 4.31% while the 10-year is up 1 bp to 3.71%. A disciplined Fed persists in supporting the dollar as the greenback continues to gain momentum from its April low of 100.8. The Dollar Index is up 30 bps to 103.78, a meaningful gain in the last few weeks. Crude oil is up strongly again, a day after Saudi Arabian Oil Minister Prince Abdulaziz bin Salman told oil shorts to \u201cwatch out,\u201d reflecting a bullish outlook from the Kingdom\u2019s oil ministry. WTI crude oil is up 2.1% to $74.42 per barrel.<\/p>\n\n\n\n

Recent earnings reports illustrate the benefits of mortgage interest rates stabilizing in the first quarter (they have since started to increase), while consumers have struggled with higher costs of living. Corporations, meanwhile, are continuing to spend on technology that makes their operations more efficient. These themes are illustrated by the following examples:<\/p>\n\n\n\n