Debt Ceiling Fears

Key Takeaways

• Deadline For Debt Ceiling Nears
• OPEC+ Issues Warning
• Volatility Climbing

Concerns over the debt ceiling may have finally begun making their way into the market. On Tuesday, the S&P 500 fell by 1.1%. With the lone exception of energy, every sector within the S&P lost ground Tuesday. At the same time, the recently strong Nasdaq Composite dropped 1.3%. Nvidia dropped over 1.5%. Microsoft
MSFT
fell 1.8% and Google
GOOG
was down 2%.

The lack of a deal in Washington has also caused interest rates to creep higher. Yields on 2-year notes, which were as low as 3.66% at the beginning of May are now over 4.29%. The benchmark 10-year has also moved higher, climbing to 3.69% after being down to 3.34% earlier this month. The rise in rates comes at a time when recent economic data has shown a continuing strong economy. That has caused expectations as to what the Fed will do when they meet next month to become more fluid. Heading into Wednesday, there is now a 33% chance the Fed will raise rates a quarter point at their next meeting. Later today, we’ll get the release of minutes from the last Fed meeting and a look into what members were thinking.

The energy minister from Saudi Arabia issued an ominous warning Tuesday. Prices of oil have climbed 17% from their lows this month and there are now fears OPEC+ may announce a cut in production. That news came after the UK announced inflation was at its lowest level in a year. Inflation rates in the UK dropped from over 10% in March to 8.7% in April. If OPEC+ does in fact cut production, that could quickly erase any progress on reigning in inflation not just overseas, but also domestically.

A few companies making news this morning are Abercrombie and Fitch, Netflix
NFLX
, as well as Chinese computer manufacturer Lenovo. Abercrombie released earnings before the open, beating expectations and issuing a positive outlook. In premarket trading, shares of Abercrombie are up 17%. Netflix has begun cracking down on password sharing here in the U.S. as the streamer looks to force viewers to pay for the service. Meanwhile, Lenovo issued weak earnings and a disappointing outlook as demand for personal computers continues to fall. Although Lenovo does not trade in the U.S., the continued weakness in the PC market does have implications for other U.S. computer and chip manufacturers. Speaking of chip makers, after the close today, Nvidia is scheduled to report earnings. Nvidia’s market cap has increased by nearly $400 billion this year, making this earnings report particularly important.

Finally, it was just a week ago I was saying markets didn’t seem too concerned about the debt ceiling. Volatility levels were well below their historical averages. As we say though, markets move. And move they have. The VIX is up over 5% in premarket and over 22% since last Thursday. As we head into the long holiday weekend, it appears investors’ patience with Washington is growing thin and fear is increasing that a deal will in fact get done despite the fact this issue has been lingering for the better part of a year. In the meantime, while we continue to watch the sausage get made, I would stick with your investment plans and long term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.