Debt Ceiling Crisis: Here Are Assets Investors Will Watch Closely As Market Braces For Volatility

Investors and traders are bracing for potential volatility in currencies and losses in equities as the debt ceiling crisis enters the fourth week of May with both parties yet to reach a consensus.

President Joe Biden and House Speaker Kevin McCarthy will meet on Monday to discuss the matter, following a “productive” phone call as the President headed back to Washington following the G7 meeting. Before leaving Japan, the President said in a briefing that his administration is willing to cut spending as well as raise revenue.

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Strategists at JPMorgan Chase & Co. and Morgan Stanley have cautioned that a stand-off threatens the outlook for equity markets while traders have taken positions in swaps and options for major currencies to hedge their portfolios, reported Bloomberg.

Price Action: U.S. equity markets have so far shown resilience to the debt ceiling impasse. The SPDR S&P 500 ETF Trust SPY closed 0.15% lower on Friday while the Invesco QQQ Trust Series 1 QQQ lost 0.23%, according to Benzinga Pro.

However, the bond market appears to be reflecting concerns over the political stand-off. On Friday, the U.S. was reportedly forced to pay record-high interest rates in a recent debt offer. The iShares 1-3 Year Treasury Bond ETF SHY closed 0.07% lower on Friday while the Vanguard Short-Term Treasury Index Fund ETF VGSH closed 0.05% lower, according to Benzinga Pro.

The dollar index was trading lower by 0.18% at 103.01 during Monday morning Asian trade. The S&P 500 futures were trading lower by 0.04% while the Dow Futures were down 0.09%. In addition, the yen, commodity currencies and emerging-market equities that are sensitive to swings in risk sentiment will also be closely watched, the report said.

Carol Kong, strategist at Commonwealth Bank of Australia in Sydney told Bloomberg that despite encouraging headlines, history indicates lawmakers will take things down to the wire, which will add to market volatility.

"If, and once, an agreement is reached, [the] focus will quickly shift back to economic data and the FOMC, which I think will lead to further modest dollar gains," Kong said.

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