Swissquote: US debt ceiling, energy crunch dampen the market mood

29 september 2021

By Ipek Ozkardeskaya, Senior Analyst, Swissquote

The market is painted in flashy red on the back of a combination of several factors ranging from the risk of a US government shutdown if the US policymakers can’t agree to raise the debt ceiling before Thursday night, the energy crunch that puts pressure on energy prices, which in return puts pressure on the inflation expectations, and combined with the US approaching its debt ceiling deadline without having found an agreement to raise the ceiling puts a strong positive pressure on the US yields. The US 10-year yield advanced past the 1.50% mark, as US equities had their worst day since May.  

US debt ceiling will likely be raised & provide relief to the market 

On Monday, Republicans blocked a bill that would push back the debt ceiling to December, and avoid a government shutdown by October 1^st. Ok so the first time I heard bout the debt ceiling discussion, years ago, I thought it was a big deal, but it’s not, as the Congress raised the debt ceiling dozen times in the past two decades. Well this time, Democrats are also trying to simultaneously pass a $4 trillion spending bill. It’s complicated, but the debt ceiling will certainly be raised as no politician on both sides of the table wants to see the US default on its obligations by mid October. So I am not much worried about that. I mean, it also happened that the US politicians couldn’t agree on raising the debt ceiling, which resulted in US government being shut for weeks, but at the end of the day, an agreement is always sealed. 

Obviously, the political deadlock in the US will likely continue exercising some more downside pressure on the US stock markets. The S&P500 is again testing its 100-dma to the downside, which could be an interesting buy level for those expecting an imminent relief in the US stock markets with an eventual deal between the US policymakers for raising the debt ceiling. 

Energy crunch should also wane 

Wherever we turn our heads we see problems regarding to energy supply. We already talked about the Chinese supply shortages, which are mostly driven by government asking many provinces to curb activity or shut down factories to meet Beijing’s green goals. That’s partly understandable, but fully bad for the market mood.  

Elsewhere, supply chain disruptions and a slower-than-needed rise in alternative energy production that fails to keep up with the pace of the post-pandemic recovery in activity, are also weighing on the global energy production and pressuring energy prices higher.  

US crude flirted with $77 per barrel then fell yesterday, and Brent crude hit $80 for the first time in almost three years as we saw Brits making long queues in front of British gas stations to get some fuel for their vehicle as there is not enough truck drivers to drive oil to the gas stations. Apparently, many truck drivers weren’t British and had to leave the country with the Brexit.  

On the other hand, OPEC+ output reportedly fell by 150’000 barrels per day versus the 400’000 barrel increase planned by the cartel. That decline is due to a maintenance work in Kazakhstan and unplanned supply disruptions in Nigeria, Mexico and Libya. Add to that the pressure on US oil reserves due to the Hurricane Ida, you have a nice squeeze in global oil supply. 

But most factors that push oil prices higher are short-term issues. The UK will now hire more truck drivers and even mobilize the army to get oil in stations and end the chaos, OPEC exports rebounedd in September as the group is planning to add more supply in the coming months, and the Hurricane Ida’s impact on US oil reserves should slowly fade. The latest API data showed an unexpected 4.1-million-barrel rise in US oil reserves last week, and today’s more official EIA data should also surprise after seven straight-week decline in US oil inventories. If that’s the case, we shall see a further downside correction in oil prices from the actual levels, but the market could easily find support near the $72 per barrel before making sure that the supply issues are fully resolved.

FTSE 100 outperforms 

The energy crunch and rising energy prices are a boon for the FTSE stocks. While European indices fell more than 2% on Tuesday’s session, FTSE 100 managed to limit losses and closed the session only 0.5% lower. Firmer oil and commodity prices, combined with a nosedive in the British pound will likely invite dip buyers as we approach the 7000p mark.