Author: Don Obrien

US stocks advance on debt ceiling deal

Stocks on Wall Street zoomed higher on Thursday after the US Senate reached a deal on a stop-gap measure to extend the debt ceiling, avoiding a US government default for now.

The proposed agreement would increased the debt limit by $480bn, enough to fund the government through to early December. As fears of a default abated, investors ditched safe-haven assets such as Treasury debt in favour of riskier opportunities including stocks.

The blue-chip S&P 500 index closed 0.8 per cent higher, while the technology-focused Nasdaq gained 1.1 per cent, with both US markets now firmly in positive territory for October after losing about 5 per cent each last month.

Yields on longer-dated US debt rose as investors moved out of lower risk assets. The yield on the benchmark 10-year Treasury note climbed 0.05 percentage points to 1.57 per cent, touching its highest level since June.

Investors said the market rebound was not simply about the debt ceiling, as the extension would also give President Joe Biden time to focus on securing agreements for his $1.2tn infrastructure bill and $3.5tn welfare spending package.

“It creates a lot of relief because it’s not just about the debt ceiling,” said Edward Park, chief investment officer at the wealth manager Brooks Macdonald.

“The idea of a debt ceiling agreement buying time for the Democrats to get their social and infrastructure packages together is a positive for risk appetite.” 

Yields were also up in anticipation of the closely watched US jobs report to be released Friday, which is likely to influence US central bank policymakers as they debate removing crisis-era stimulus.

Analysts expect that US employers added roughly 500,000 new jobs in September. A figure in excess of that, accompanied by a drop in the unemployment rate, would bring forward market expectations of the first post-pandemic interest rate rise, said Brian Nick, chief investment strategist at Nuveen.

“It will put the Federal Reserve in the position where they have to worry about wage inflation as well as all the other factors,” he said.

Elsewhere, European stock markets rallied on Thursday, as signs that Russia may help avert a full-blown energy crisis eased concerns about inflation. The moves came after European and UK gas prices dropped, tempered by Russian president Vladimir Putin saying his country was prepared to stabilise the market after prices shot higher on Wednesday.

Russia, a big supplier of gas to Europe, has been accused by some European politicians of deliberately withholding supplies in an effort to win approval for the contentious Nord Stream 2 pipeline, which would send the fuel directly to Germany.

The benchmark Stoxx 600 share index closed up 1.6 per cent while London’s FTSE 100 rose 1.2 per cent.

UK gas contracts for November delivery, which reached more than £4 a therm on Wednesday, fell to £2.55 by Thursday afternoon in London.

Olivier Marciot, cross asset investment manager at the fund manager Unigestion, cautioned that while power prices could moderate, markets would remain vulnerable to broader price pressures hitting consumers and prompting central banks to raise interest rates.

“It is not just about gas,” he said, referring to increases in the prices of commodities from cotton to coffee alongside pandemic-related worker shortages in the US, Europe and the UK.

Headline consumer price inflation in the US has topped 5 per cent for three months and hit a 29-year high in Germany.

US energy secretary Jennifer Granholm told the Financial Times on Wednesday that the White House may release strategic oil reserves to stop the gas shortage dragging crude prices higher. Brent crude settled up 1.1 per cent to $81.95 a barrel after approaching $83.50 on Wednesday.

Unhedged — Markets, finance and strong opinion

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Oliver Bolt

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