Lack of progress in US debt ceiling negotiations puts a cap on equity markets

Global and Philippine Market Update
May 17 to May 24, 2023

Global Markets

Global Stocks edged lower as negotiations surrounding the US debt ceiling continues. 

• UK inflation exceeded expectations reaching 8.7%, driven by services and core prices rising at the fastest pace in over three decades. This has led to speculations of more interest rate hikes by the Bank of England (BOE). Despite inflation falling into single digit for the first time in eight months, the higher-than-expected figure puts pressure on the central bank to continue raising rates. Traders anticipate another 1% increase before the hiking cycle ends, fueled by elevated grocery bills and a tight labor market.

• The ongoing deadlock in Congress has brought the United States dangerously close to a potential default, raising concerns about its perfect credit rating. Fitch, a leading rating agency, has placed US credit on a negative watch, citing the uncertainty surrounding the debt and the risk of a historic default. However, Fitch remains hopeful that lawmakers will find a resolution before an actual default takes place. The Treasury department has urged lawmakers to address the debt ceiling issue promptly, warning that a downgrade could have severe consequence for businesses and American families, leading to increased borrowing costs.

• Blackrock’s bond chief Rick Reider expressed optimism about the US economy, citing factors such as robust government support, strong consumer spending, improving home builder data, and low unemployment. Reider believes that a recession is highly unlikely with unemployment at 3.4%. While many anticipate a significant slowdown, a closer examination of the data does not support this notion. However, Reider acknowledges that the potential risk to his viewpoint is a US default, but he expects the White House and Congress to eventual reach a suitable resolution.

Philippine Stocks

Philippine Stocks were marginally lower as offshore headwinds hinder market momentum.

• Philippine stocks remain constrained as investors stay on the sidelines, awaiting progress in the US debt ceiling negotiations. The market’s momentum is being hindered by negative external factors. The uncertainty surrounding the US debt ceiling issue weighs on investor sentiment and inhibits the market from gaining sustained upward momentum.

• Fitch Ratings has improved its outlook on the credit rating of the Philippine national government, upgrading it from “negative” to “stable.” This signifies increased confidence in the country’s economic prospects and its ability to achieve solid medium-term growth after the economic impact of the pandemic. Despite the challenges posed by rising government debt in recent years, Fitch maintains the country’s investment grade rating of BBB. The agency anticipates a sustained reduction in the government debt-to-GDP ratio, projecting it to decline to 59% by 2024. This positive outlook is supported by strong GDP growth and efforts to narrow the fiscal deficit.

Philippine Bonds

Philippine Bonds traded below 6% as yields are expected to continue trending lower.

• The Bureau of Treasury (BTr) fully awarded a reissued 7-year treasury bond that was originally issued last April 27 at an average rate of 5.774%. This was lower than the 6% coupon rate during its original auction in April. National Treasurer Rosalia de Leon expects yields to drop further following positive revisions in the credit outlook of the Philippines and the Bangko Sentral ng Pilipinas’ (BSP) decision to pause rate hikes.

• The government is set to borrow P185 billion in June, an increase of P10 billion compared to May. Aside from the higher maturities scheduled in June, the government looks to take advantage of the current pause in rate hikes and potential reduction in the reserve requirement ratio (RRR) for banks which will likely lead to lower yields. 

FWD Guidance: Uncertainty leads to downside risks, but diversification and a long-term investment horizon still provide the best chance for financial success.

Sources: (1) https://blinks..com/news/stories/RV617EDWX2PS (2) https://edition.cnn.com/2023/05/24/business/fitch-places-us-on-rating-watch-negative/index.html (3) https://www.cnbc.com/2023bloomberg/05/23/economy-good-shape-blackrock-rieder.html?recirc=taboolainternal (4) https://www.bworldonline.com/stock-market/2023/05/22/524255/stocks-fall-on-profit-taking-as-market-eyes-leads/ (5) https://business.inquirer.net/402154/fitch-ratings-improves-outlook-on-ph-to-stable-from-negative (6) https://blinks.bloomberg.com/news/stories/RV3LJNDWLU68 (7) https://www.bworldonline.com/top-stories/2023/05/25/524794/govt-sets-p185-billion-borrowing-plan-for-june/

Disclaimer: The purpose of this article is to inform and should not be taken as an advice or offer to purchase securities. Seek professional advice before making a decision based on this presentation. Information given does not represent the views of FWD and its agents and employees.