(Alliance News) - The risk of the US government defaulting on its debt was mere "theatre", according to Oanda analysis on Friday, after the bill to raise the US debt ceiling passed the Senate, the second and final legislative hurdle, on Thursday.
US President Joe Biden can now sign his compromise deal with Republican House of Representatives Speaker Kevin McCarthy into law, after the Senate on Thursday voted to suspend the federal debt limit until January 2025. A day earlier, the House approved the legislation.
Investor sentiment was buoyed by the news. In New York, the Dow Jones Industrial Average was up 1.5%, the S&P 500 up 1.2% and the Nasdaq Composite up 1.0%.
In Europe, the FTSE 100 in London closed up 1.6%, the DAX 40 in Frankfurt up 1.3% and the CAC 40 in Paris up 2.0%. While in Asia, The Nikkei 225 in Tokyo jumped 1.2%, the Hang Seng in Hong Kong advanced 3.9%, and the Shanghai Composite in China added 0.8%. The S&P/ASX 200 in Sydney closed 0.5% higher.
Stocks had largely suffered losses earlier in the week prior to the compromise agreement passing Congress, as the prospect of a US government debt default had loomed on Monday next week.
Oanda analyst Craig Erlam downplayed the risk as "Washington brinkmanship" and "part of the theatre of the negotiation".
"Rarely do you have a situation in which everyone appears to be in agreement but we've seen over the last few weeks that no one at any stage thought a US default was a realistic possibility," said Erlam. "The idea that Congress would ever intentionally allow the US to default is ridiculous."
However, Erlam did note how markets reacted positively to the news: "There does seem to be some sense of relief in the markets that any risks, however minuscule, have been cast aside leaving investors to focus on what really matters at this stage; inflation, interest rates, and the economy."
Bannockburn Global was similarly incredulous that the risk of default ever existed.
"Another bizarre US debt-ceiling episode is over. President Biden will sign the bill that was approved by the Senate late yesterday. It is a bit anticlimactic for the market, for which the US jobs data is the key focus now." it said.
Markets also responded well to US employment growth being stronger than expected last month, according to fresh figures released on Friday.
According to the US Bureau of Labor Statistics, nonfarm payroll employment increased by 339,000 in May, accelerating from a rise of 294,000 in April. That number was revised up by 41,000 from 253,000. March's increase was revised up by 52,000 to 217,000 from 165,000.
The May increase was markedly above FX Street-cited market consensus of growth in jobs of 190,000.
At the same time, the unemployment rate increased to 3.7% in May from 3.4% in April. May's jobless figure was higher than market expectations of 3.5%.
Richard Hunter, head of markets at interactive investor, commented: "The labour market has been a thorn in the Fed's side as it continues to attack inflation, although investors remain divided on whether the current strength of the US economy might enable the central bank to engineer a soft landing."
RaboResearch argued the Fed's trajectory on interests is still up for debate, while Capital Economics argued: "As labour market conditions come into slightly better balance, the upward pressure on wage growth is easing...The upshot is that the Fed can still afford to skip a rate hike in June."
Writing before the US jobs data release on Friday, AJ Bell's Russ Mould said attention would now turn away from the US debt ceiling and onto to other matters, after "disaster [was] averted for now".
Overshadowed by the drama in Washington, Mould said "this isn't necessarily a good thing for markets as there is plenty to worry about, including a sluggish recovery in China and continuing risks around recession and rates in the West".
The Fed will next meet to decide on US interest rate hikes at its meeting on June 13 and 14.
By Greg Rosenvinge, Alliance News reporter
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