Debt talk optimism buoys S&P 500, regional Banks end losing streak, Gold dips

The S&P 500 rose on optimism that the White House and House Republicans will reach a deal to avert a debt crisis, after House Speaker Kevin McCarthy said that now the two sides are sitting down for discussions he believes that the US will not default on its debt. Regional bank stocks were leading today’s gains, reflecting easing concerns for that sector, seemingly ending a three-month decline.

Debt ceiling crisis averted (for the 79^th time)?

Congress has increased or suspended the debt limit 78 times since 1960, according to the Treasury Department. While US debt talks continue to occupy the headlines, we’ve been through this many times before and the ceiling always gets raised  as neither side wants to see a default on our nation’s debt. Wall Street continues to expect an increase, but recognizes that there is some degree of risk that it might not. The good news is that the two sides are finally talking, which means that they’re willing to negotiate. However, both sides also know that their greatest leverage in negotiations comes in the 11^th hour of the talks, and we’re not there yet. Two main points of discussion are the scope of the increase, and agreed budget restraints or cuts. However, there is still no answer to the larger problem: addressing the exploding interest costs of this debt.

Regional Banks end bear run in bullish market

• At the time of writing, the broad S&P 500 and NASDAQ indices were both up by 1.2%, while the broader Russell 2000 was up by 2.1%
• For the second day running, the major move was strength in the KBW Regional Bank Index, up 7.1% today, resoundingly ending a three-month decline
• The VIX, Wall Street’s fear index, fell 5.5% to 17.9
• The dollar index rose 0.2% to 102.6, with Dollar/Sterling and Euro/Dollar pretty much unchanged
• Yields on 2- and 10-year Treasuries again rose modestly to 4.15% and 3.58%, respectively

Gold falls under 2K mark, Oil rebounds

• Gold prices fell by 0.4% to $1,984 per ounce, still at the upper end of a 3-year trading range and below the 2K mark
• Crude oil prices bounced back, up 2.0% to $72.9 per barrel, at the lower end of a 3-year trading range and above the $70 support level
• The grain and oilseed complex were mixed, with the hard wheat markets firmer on weather worries, while corn and soybean prices continued to post double-digit losses

Housing starts cool, held back by higher rates

• April housing starts rose to an annualized rate of 1.401 million units, slightly below the expected 1.405 million
• March starts were revised to 1.371 million units, down from the 1.420 million originally reported
• April new housing permits came in at an annualized rate of 1.416 million, below the expected 1.430 million
• March numbers were revised to 1.437 million, up from the 1.413 million originally reported.
• Industry sources continue report pent-up US demand for homes, but buying is limited by current uncertainty and higher interest rates

Modest rise in US crude oil inventories

• US crude oil inventories, less the Strategic Petroleum Reserve, rose by 5.0 million to 467.6 million barrels in the week ending May 12, slightly below levels typically seen in mid-May
• Gasoline stocks fell by 1.4 million barrels during the week, 6% below the five-year average for the week
• Distillate stocks rose by 0.1 million barrels, putting them 16% below seasonal levels
• Ethanol stocks slipped to 23.2 million barrels during the week, down from 23.3 million the previous week, and down from 23.8 million barrels in the same week last year

More data casts doubt on the health of the Chinese economy

• China’s National Energy Administration reported total electricity consumption fell 6.35% month-on-month in April, and power generation declined 8.21%
• Domestic coal production dropped 8.6% month-on-month
• Coal import growth slowed to 72.7% year-on-year, down from 150.7% in March
• Domestic crude oil production fell 1% month-on-month in April, while crude imports dropped 1.4% year-on-year, versus an increase of 22.5% year-on-year in March

Ukraine grain initiative on again

• The Ukraine grain initiative is on-again today, and Turkish officials say a deal is a “high probability”
• Extension of the agreement was complicated by Turkey’s presidential election process, which is now waiting for a run-off election on May 28
• The current deal is set to expire tomorrow, with recent movement only seeing cargoes leaving the ports, with no new ships moving into the ports due to the uncertainty
• The deal was first inked in July of last year, and it has facilitated some 30 million metric tons of Ukraine exports since then
• Fifty percent of the exported grain was corn, while another 28% was wheat

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com