Washington reaches a tentative debt-ceiling agreement | Banking Updates

AT A GLANCE

A debt-ceiling deal was agreed between President Biden and House Speaker Mc Carthy last week-end
We think it should win US Congressional approval Wednesday, removing a potentially devastating tail-risk
This however doesn’t change the big picture, and we stick to our reasonably cautious positioning.

The focus of the recent weeks reached a key stage late on Saturday, with a debt-limit deal being agreed between the Biden administration and the Republican House Speaker. Both sides made compromises: the debt ceiling will be suspended until January 1st of 2025, in exchange for a cap in non-defense federal spending for two years. The next step is to have a corresponding bill being voted by the US Congress, starting with the House on Wednesday. We are reasonably confident it will pass.

This is good news or, more precisely, this is the potentially catastrophic risk of a US debt default being removed from the investment landscape. We had always put a neglectable probability on such a nightmare scenario anyway, but this means that this doesn’t really affect the big picture. While global activity remains on a very solid ground, clouds are accumulating for the quarters ahead: persistent inflation, higher interest rates for longer, constrained credit supply and now some level of fiscal drag are uncertainties at best, clear headwinds at worst, which are not reflected in the valuation of some asset classes. We are, again, not outright bearish but stick to our overweight on money market funds, while being cautious on risky bonds and on stocks from emerging markets.

We start the week with a market holiday in the US but do not expect risk assets to skyrocket in response to the debt-ceiling deal. Their fundamental upside potential is limited, and we will get important economic data, especially Friday’s US monthly job report, to gauge whether the Fed may hike again in June or July. The market consequences of the probably deluge of Treasury issuance once the debt-ceiling is suspended are also difficult to predict – and potentially not great. Have a great week.

Washington reaches a tentative debt-ceiling agreement

Cross-asset Update

Inflation technology stocks have surprised to the upside on growing enthusiasm about disruptive innovation driven by AI, to an extent that year-to-date the performance gap between the Nasdaq and the more cyclical Dow is over 20%. Market breadth has been very skewed towards growth stock, while cyclical sectors have been left behind. Amidst persistent uncertainty, such gap can be maintained in our view, as the quality factor continues to uphold the sector versus the broader market. Indeed, we hold the view that IT outperformance is not only about ChatGPT, but rather about the quality of the balance sheets of large-cap IT companies that supports them, amidst growing scepticism towards companies more geared to the business cycle. The fact that the MSCI World Information Technology sector against the market has been tracking the relative performance of the MSCI Quality Index is just a confirmation of what observed above. Even in the case of a US recession, the less cyclical segments of IT, from platforms to software, could continue to surprise to the upside amidst falling yields, making the whole sector even more expensive.

As for the broader market rally, we see both lights and shades in the shorter term, while remaining sceptical about the sustainability of the upside in the longer run due to the banking crisis and the lagged negative effects of the Fed’s tightening. On the positive side, both positioning and sentiment do not seem to be excessive, as indicated both by net long futures positions across the main US indices and sector risk premia we have worked out to derive proxies for investor sentiment. With positioning at best neutral and sentiment still below neutral levels, there seems to be more room for animal spirits to get further invigorated. At the same time, the lifting of the debt ceiling, contrary to common belief, is not a net positive for markets. The US Treasury will be increasing issuance to replenish its General Account, sucking liquidity out, that alongside the unabated Quantitative Tightening carried out by the Fed should further and significantly tighten financial conditions. Also, one more rate hike cannot be ruled out, either in June or July, as the US economy remains resilient, and inflation still surprises to the upside.

Overall, we believe the rally will continue to be skewed and marked by poor breadth, and that further upside at some point will be capped either by tighter financial conditions or a sharp slowdown in the US economy. Our best advice is still for clients to be very selective when adding to risk. Gold is a precious edge in the current environment, though still has to work through some of the excessive speculative positioning driven by heightened expectations of the Fed’s tightening cycle drawing to an end.

Washington reaches a tentative debt-ceiling agreement

Fixed Income Update

It was a sense of Déjà vu last week. The US debt ceiling impasse went down to the wire as a rating agency placed the AAA rating of the country on rating watch Negative. But finally, as expected, both sides reached an agreement just in the nick of time to avoid this. Although the UST yield curve bear-flattened, expect it to re-steepen this week. Debt ceiling agreements should provide relief to the front-end treasuries. However, more notably, the liquidity will come under pressure. The TLTRO repayments and the ECB's QT are added to the liquidity contraction forces in the US, i.e., the impending Treasury General Account balance build-up, the Fed's QT, and the continued shift from US bank deposits to MMFs, are the main culprits for draining liquidity.

Regarding bond positioning, the record net shorts in the CFTC data are being distorted by basis trades – with leveraged investors short futures & long cash. So while there's no doubt that there is some buying by hedge funds and long-only institutions this year, there's plenty of room for longs to build ahead of any Fed easing cycle.

Over the past few weeks, markets have forcefully repriced Fed cuts on the back of fading external risks and fairly upbeat macro data. As per the latest data, there are no rate cuts priced in this year from three rate cuts barely a month ago. But this repricing may be done now. Based on past easing cycles, we may need to see the trend of NFP falling below +100k for the Fed to consider lowering rates. So all we could say is that bond yields are poised on a knife's edge with a sharp tilt to yields coming down in the future.

Yield premiums on dollar bonds in Asia tightened on Monday after the debt-ceiling deal. This should be replicated across various segments of the fixed income. All the segment OAS spreads currently trend near the median YTD level and hence not wide enough to enter risky HY trades.

Coming to the region, S&P confirmed Bahrain's sovereign rating to B+, with a positive outlook. The positive outlook reflects the wider current account surpluses and continued financial sector stability in the near term. In addition, S&P estimates the government to continue implementing reforms to reduce the budget deficit. Bahrain posted a record current account surplus of 15.4% of GDP in 2022. Last week, S&P also highlighted the strength of the Dubai government balance sheet by reducing debt forecasted at about 51% of the GDP ($66 billion) in 2023. Also, S&P highlighted that the robust recovery of the real estate and tourism sectors, measures taken for social and economic reforms, and GREs monetization are helping in economic growth.

Washington reaches a tentative debt-ceiling agreement

Equity Update

A sigh of relief for markets, with a deal to raise the US debt ceiling, in a bid to avert a US debt default. Market reaction to the issue is less significant than the evolution of market liquidity post the debt-ceiling resolution, and the T-Bill issuance that follows. US debt ceiling worries did not overly impact markets last week, with global equities down just half a percent. Whilst global equities are + 9%, global equity flows are flat YTD, in contrast to inflows of $175bn in 2022, $949bn in 2021 and $182bn in 2020. (Bank of America data). On the other hand, inflows to cash/money market funds YTD are at a record, and now even depleting deposits of the big banks.

Last week, saw small gains in US equities, the S&P 500 crossed the key level of 4200 on Friday. It was a good week for India, with all other major global markets in the red. China equities fell-3% and the MSCI China is -6% YTD as worries about China’s economic recovery are surfacing. We are overweight EM Asia and Japan and whilst India and Japan have shown recent gains, China has back tracked. We still have confidence in its recovery based on domestic demand resurgence. UAE markets were little changed last week, and continue to see strong interest in IPO’s with ADNOC Logistics increasing its offering to 19% of the company's total issued share capital with the gross demand surpassing $125 bn, a 163 times oversubscription rate, marking the highest-ever for a UAE book-build IPO.

Japan equities are outperforming with the Nikkei +18.5% YTD. Japan’s recovery lagged that of the US and Europe the last 3 years, as Covid-related restraints on mobility lasted longer. This is expected to change with growth set to accelerate, driven by stronger domestic demand and supported by the reopening. There is not yet runaway inflation and real rates should remain accommodative, helping to catalyse a revival in capex. Also, no tightening in sight. Besides macro factors supporting Japanese equities which are at a 33-year high are margins, consumption, and investment indicators rebounding.

Also standing out is the Nasdaq up +24.5% YTD, (last week +2.5%), with AI fueled gains for mega cap tech and semi stocks. Even with anxiety around the debt ceiling, the last couple of weeks have been dominated by the growing AI-fervour leading to a chase for upside with low equity positioning as, for many, there’s been a lack of participation in equity performance year-to-date. MAGMA or MAGMNA, the new acronym more AI centric, is taking over from FAANG. Nvidia could become the first chipmaker to be valued at more than $1tn, as demand for its AI processors has led to large revenue and profit gains. Nvidia appears within reach of joining Apple, Microsoft, Alphabet, Amazon and Saudi Aramco, companies valued at more than $1tn. The SOXX semiconductor ETF of 30 US companies, is up 18% in two days, seen as an AI play. The narrowness of the equity market leadership (7 stocks account for the majority of YTD S&P500 gains), has made this a very difficult market to navigate as large-cap tech performance has dominated all else. Info tech was the only global sector positive last week.

Washington reaches a tentative debt-ceiling agreement

Written by:

Maurice Gravier Chief Investment Officer , [email protected]
Anita Gupta Head of Equity Strategy , [email protected]
Satyajit Singh Fixed Income Analyst , [email protected]
Giorgio Borelli Head of Asset Allocation , [email protected]

Disclaimer

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), a public joint stock company incorporated in Dubai, United Arab Emirates (UAE) and licensed to provide various financial services including promotion, financial consultation, securities portfolio management, managing investments of investment funds, etc. Emirates NBD is regulated supervised and controlled by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”), having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

This publication is prepared without regard to the individual financial circumstances and objectives of persons who receive it. Data/information provided in this publication are intended solely for illustrative purposes for the general information or its recipients, irrespective of their customer classification as an Ordinary Investor or Professional Investor under the SCA Regulations.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.

Reliance

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accept any responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they may not be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.

Confidentiality

This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.

Solicitation

None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.

Liability

Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor.

Where this publication provides any information about Shariah compliant products, the Bank will not have engaged a Shariah board (or similar body) to determine independently whether or not such products are compliant with Shariah principles. The Bank accepts no liability with respect to the fairness, correctness, accuracy, reasonableness or completeness of any such determination or guidance by any Shariah board that has certified or otherwise approved such products as Shariah compliant. Nothing contained in this publication shall be construed as a recommendation by the Bank to invest in such product. In deciding whether to invest in Shariah compliant products, you should satisfy yourself that investing in such products will not contravene Shariah principles. You should consult your own Shariah advisors as to whether investing in such products is compliant or not with Shariah principles.

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Risk

Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investor may lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.

IMPORTANT INFORMATION ABOUT SINGAPORE

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit www.emiratesnbd.com.

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.

more app

Personal | Home | Auto Loans