Market Watch: May 26

On Wednesday, North American equity markets dropped. Sentiment toward risk assets continued to be muted amid concerns an agreement on the U.S. debt ceiling would not be reached, which could push the U.S. economy into a recession. The Dow lost 256 points by the close, the S&P 500 went down by 30 points, and the Nasdaq declined by 76 points. In Canada, the TSX saw a 218-point decrease amid concerns about the global economy.

On Thursday, North American equity markets finished mixed. While the U.S. debt ceiling concerns weighed on investors, tech stocks in the U.S. got a boost after NVIDIA Corp. provided an optimistic sales forecast. U.S. economic growth came from higher consumer spending over the quarter but was partially offset by a slowdown in business spending and a fall in real estate investment. By the close, the Dow decreased by 35 points, the S&P 500 was up 36 points, and the Nasdaq went up by 214 points. In Canada, the TSX decreased by 154 points, dragged down by the Communication Services sector.

North American Indexes end the week low

For the four trading days covered in this report, the Dow decreased by 662 points to close at 32,765, the S&P 500 went down 41 points to settle at 4,151, and the tech-heavy Nasdaq gained 40 points to close at 12,698. In Canada, the TSX fell by 577 points to end at 19,774.

Strategy

Deadlock in Congress has called the stability of U.S. credit rating into question

Ratings agency Fitch placed U.S. government debt on “rating watch negative” yesterday, reflecting the uncertainty surrounding the impasse in Congress. The move could signal an impending credit rating downgrade of U.S. sovereign debt if Congress does not raise the debt limit. The news harkens back to 2011 when S&P downgraded the U.S.’s credit rating from AAA to AA after a similar brush with default. Over a decade later, the agency has not restored the original rating. Although Fitch expects a resolution before the deadline, the warning could raise the risk that its peer, Moody’s Investor Services, could follow suit.

Until now, Moody’s has maintained the U.S.’s top rating while S&P classifies U.S. debt as “stable.” The market is reflecting uncertainty over debt limit negotiations. According to Bloomberg, yields on short-dated Treasuries have spiked, with bonds slated to mature in early June yielding upwards of seven per cent. The cost of insuring sovereign debt has also surged, as reflected by spreads on U.S. credit default swaps. Despite the heightened uncertainty, our base case is for a deal to be reached in the coming days and passed into law by the X-date. Should Congress fail to do so, we think the next most likely scenario would be a short-term extension (weeks or months) to allow for further negotiations between the two sides.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: May 26

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