Why not to buy a stock based on its earnings performance
The stock market climbed on speculation that a narrower group of Washington negotiators will break a deadlock on raising the U.S. debt ceiling and avoid an unprecedented default.
Equities halted the recent trading lull, with gains in the S&P 500 topping 1 per cent and the Nasdaq 100 hitting the highest since August. Treasuries dropped, with yields on 10-year notes approaching 3.6 per cent. President Joe Biden expressed confidence there will be no default, and House Speaker Kevin McCarthy said reaching an agreement this week is “doable.”
“We don’t want to get too excited as the two sides reportedly remain far apart,” said Win Thin, global head of currency strategy at Brown Brothers Harriman. “However, we get the sense that there is a real effort to avert a debt ceiling catastrophe as the X-date of June 1 is fast approaching. Stay tuned.”
JPMorgan Chase & Co.’s chief Jamie Dimon said the U.S. government “probably” will not default on its debts. He joined other top executives of major banks in a meeting with Senate Majority Leader Chuck Schumer to discuss the debt limit.
The Treasury’s cash balance rose to US$94.6 billion as of May 16, according to data published Wednesday. That’s up from from US$87 billion a day earlier and compares with US$140 billion at the end of last week. The Treasury’s bank account has been under downward pressure recently because of measures being taken to avoid breaching the US$31.4 trillion debt cap.
“We all know the U.S. Treasury is about to run out of ways to pay its bills, but we have seen this movie too many times before,” said Chun Wang at Leuthold Group. “While, theoretically, there is a threat of default, we certainly don’t recommend planning our lives around it. The script is very predictable: political posturing and grandstanding will go on until the 11th hour, and then a deal will be hastily put together to avoid a default.”
If history is any guide, the debt-ceiling turmoil tends to be short-lived, without much impact on stocks before or after a resolution, Wang added. However, the August 2011 instance caught many investors by surprise, with equities slumping for a week or so before stabilizing. Assuming the date of resolution is June 1, the current pattern is “uncomfortably similar to August 2011,” he noted.
To Amy Wu Silverman at RBC Capital Markets, while markets are betting on a rocky end to the debt-ceiling debate, if they are wrong, investors may miss out on the gains.
“The tale of optimism does not exist,” she told Bloomberg Television. “Is there a possibility of a congressional miracle? If it at all comes in a little bit easier than we expect, that right tail is very cheap.”
Also helping sentiment Wednesday was a rally in regional banks after Western Alliance Bancorp reported growth in deposits, easing worries about the health of the industry.
In late trading, Cisco Systems Inc. dropped after the networking company reported its third-quarter results and gave an outlook. While the report was better than expected overall, Vital Knowledge noted some weakness in underlying numbers.
Key events this week:
- U.S. initial jobless claims, Conference Board leading index, existing home sales, Thursday
- Japan CPI, Friday
- ECB President Christine Lagarde participates in panel at Brazil central bank conference, Friday
- New York Fed’s John Williams speaks at monetary policy research conference in Washington; Fed Chair Jerome Powell and former chair Ben Bernanke to take part in panel discussion, Friday
Some of the main moves in markets:
- The S&P 500 rose 1.2 per cent as of 4 p.m. New York time
- The Nasdaq 100 rose 1.2 per cent
- The Dow Jones Industrial Average rose 1.2 per cent
- The MSCI World index rose 0.6 per cent
- The Bloomberg Dollar Spot Index rose 0.2 per cent
- The euro fell 0.2 per cent to US$1.0840
- The British pound was little changed at US$1.2493
- The Japanese yen fell 0.9 per cent to 137.60 per dollar
- Bitcoin rose 1.7 per cent to US$27,405.7
- Ether rose 0.5 per cent to US$1,830.52
- The yield on 10-year Treasuries advanced four basis points to 3.58 per cent
- Germany’s 10-year yield declined two basis points to 2.34 per cent
- Britain’s 10-year yield advanced two basis points to 3.84 per cent
- West Texas Intermediate crude rose 2.7 per cent to US$72.74 a barrel
- Gold futures fell 0.3 per cent to US$1,986.40 an ounce