US Debt Ceiling: Tentative Deal has been reached but still room for uncertainty?
President Joe Biden and Kevin McCarthy have reached a tentative deal to lift the $31.4 trillion debt limit.
The White House and House Republicans late Saturday night announced they have come to agreement ending a long standoff between the two parties. This is good news for the market which should boost overall appetite for risk, while also buoying some of the sectors that have been left behind in this year’s tech-led equity rally, such as cyclical stocks and small caps. Markets have responded positively although it has to be said that the equity markets had largely ignored the standoff with markets having already priced in as if the deal is going to get passed. The equity market has been largely resilient with underlying volatility also being tepid in the face of what could have been a catastrophic event for equity markets.
The deal still needs to be passed by both the House and the Senate and if for whatever reason we see a spanner in the works and the deal is not passed by the ‘X’ date in June then the rally we have seen in the last week could well unravel and led to a sell off.
A look back at the 2011 debt ceiling crisis saw markets tumble after lawmakers came to an agreement just hours before the deadline. The S&P 500 lost almost 11% between July 21 to August 5th. History doesn’t always repeat itself, but it does tend to rhyme so could we see the same reaction this time around. Even if they raise the debt ceiling, the recent long standoff could lead to a big loss of confidence in America’s financial system.
The chart above shows the first support channel at 4048 but if the market does react as it did in 2011 even after a deal was reached, the next channel of support is at 3800.
Long Put Spread
Long Put Spread
Mini S&P Options (ES)
Net cost of trade: $60 – $6.50 =$53.50 x $50 per index point ($2,675)
Max profit: 4225-3800 = $425x $50 per index point ($21,250) – ($2,675)