We Have a Deal.  Now What?

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Chief Strategist

Interactive Brokers

The cliffhanger seems to be coming to a satisfactory ending yet again.  Three weeks ago, we wrote:

…most [investors] have decided that they’ve seen this movie before, and remember that it always had a satisfying ending regardless of the suspense.

It’s a good thing that we only learned after the close on Friday that June 5th was the do-or-die date.  Markets might have needed to take a break from their weekly 0DTE enthusiasm (remember, all weekly options become zero-dated on Fridays) if they had to process the facts that:

  1. We were less than two weeks away from a potential default.
  2. The House of Representatives was scheduled to be on recess this week.
  3. During his run for Speaker of the House, Kevin McCarthy promised a 72-hour window before any legislation would be brought to the floor for a vote.

Fortunately for the US markets and economy, a deal was reached over the weekend.  Neither side is claiming a full victory, which means that it does indeed have some compromises.  Bottom line, if the deal is passed in its current form, we won’t have to concern ourselves with this lunacy for almost another two years. 

Yet we are not getting much of a relief rally today (unless you count another bout of AI enthusiasm).  As noted above, equity investors never really reacted negatively to the prospect of a debt ceiling breach, so they have little reason to express much enthusiasm today.   We raised the concern that a hardline deal with heavy spending cuts could result in a fiscal drag, but the cuts are hardly draconian.   Treasuries are rallying, even though the Treasury may need to step up its issuance of debt once the ceiling is raised, but lower yields are not offering broad support for a rally.  Heck, stocks rallied while they were rising sharply – 2-year yields were up over 50 basis points for the month as of Friday.

Now we need to concern ourselves with the machinations of Congress to assure that the current agreement becomes law.  As we wrote last week:

Even if President Biden and Speaker McCarthy emerge from a meeting singing “Kumbaya” together, a verbal agreement still needs to be approved by both houses of Congress and signed by the President.  We don’t have a deal until then.

In theory, the deal will clear the House Rules committee this afternoon.  Depending upon which Republicans decide to veto the bill, it might require bipartisan support – something which is rather unusual during committee votes.  Assuming it clears the committee today, it could come to a full vote by the House tomorrow. 

Then comes the Senate.  It is possible that the deal could face a filibuster by one or more right-wing Senators, meaning that it could push the chamber past the deadline before the President has a chance to sign the full legislation into law. 

Odds are that practical minds carry the day, especially when we consider that the stakes are so high and that the deal was negotiated in a bipartisan manner.  Markets seem to indicate that they agree, with a big “tell” being that we see VIX firmly mired with a 17 handle.  Last week, we questioned whether a deal would be a “sell-the-news” event.  So far, around midday on Tuesday, it’s more of a push.  The S&P 500 Index (SPX) is up marginally, thanks once again to rallies in the mega-cap tech stocks like Nvidia (NVDA) which are pushing the NASDAQ 100 (NDX) up about 0.7%.  Meanwhile, the Russell 2000 (RTY) and Dow Jones are both down about -0.35%.  With a few exceptions, today is a ho-hum day on a day when ho-hum is a good thing.

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