Debt Ceiling deal finally been agreed, but why no stock market rally?

Over the weekend the US Government tentatively agreed to a Debt Ceiling deal in principle (to be voted on in Congress later this week), though financial markets continue to remain skeptical of both the agreement and the economic fallout of the continued open display US political incompetence. 

Earlier in the week we summarized the debt ceiling deal here and how gold and silver were poised to perform strongly as a consequence of the agreement. 

Barring further extraordinary events, specifically an extremely unlikely to be successful push against the agreement by the House of Freedom Caucus (a hard faction within the Republican Party), the deal should go through. 

Hence, today we will take a look at why equities have not responded to what normally would have been considered overwhelmingly positive news, and what the ramifications could be. 

While the Nasdaq ended the trading day up 0.3% led by a strong tech rally, the S&P remained at 4206 and the Dow Jones finished the day in the red. Domestically, The ASX Futures this morning were also down 0.5%.

Cesar Perez Ruiz, Chief investment officer at Piccet Wealth Management has a theory as to why this is the case.

“Maybe the rally has a bit further to go but it’s more buy-on-rumor, sell on news,” Ruiz went on to say.

“As from now, we will go back to looking at economy, inflation, plus the drain of liquidity as the Treasury General Account will need to be refilled. 

Effectively, Ruiz implies that financial markets had already priced in an agreement, which of course makes sense given the history of these debt ceiling standoffs.

Furthermore, the idea that once the debt ceiling news cycle ends, the light will shine back on the broader issues of the current state of the global economy, is an idea already beginning to come into play.

More specifically, the biggest economic recession hedge, gold, was one of the biggest winners this morning as it opened 0.8% higher, back up above $1950 USD.

This comes on the heels of The May Consumer Confidence report unsurprisingly continuing its downtrend, as it fell from 103.7 to 102.33.

The report noted that “Consumer confidence declined in May as consumers’ views of current conditions became somewhat less upbeat while their expectations remained gloomy.”

Perex Ruiz ‘buy-on-rumour, sell on news’ thesis has significant merit for this reason. Not only is it becoming clear that the deal itself was already priced in, but furthermore, if the market returns to moving more according to global economic factors as opposed to debt ceiling cycle headlines, equities could be in trouble, and the gold the rally could just be getting started. 

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