Stock Market Drops Ahead of Debt Ceiling Vote

World equity markets experienced a decline on Wednesday in anticipation of a critical vote regarding the U.S. debt ceiling. This was further exacerbated by unease resulting from data that pointed towards a slowdown in China’s economic growth, which is the second-largest in the world. The weakening of commodities and the Chinese yuan were other outcomes of this data.

House Speaker Kevin McCarthy is facing backlash from conservative members of his own party over his recent debt ceiling deal with President Biden. Some members of the GOP, especially those from the House Freedom Caucus, have threatened to oust McCarthy from his position. The contentious deal aims to avoid a historic government debt default by raising the nation’s debt ceiling for nearly two years.

Members of the Freedom Caucus, like Rep. Chip Roy and Chairman Scott Perry, criticized the deal for not aligning with the party’s fiscal conservatism. However, McCarthy defended the deal, calling it the “most conservative deal” they’ve ever had. Despite the backlash, McCarthy believes his position is secure. The bill has cleared a key hurdle by advancing out of the House Rules Committee and is expected to be voted on in the House on Wednesday.

The MSCI All-World Index, which accounts for global shares and is predicted to see its first monthly decline since February, slipped by 0.4% mid-morning in Europe, primarily due to a downfall in Asian markets. The future of U.S. stock indices and the decline in values ranged between 0.3-0.4%.

China’s manufacturing activities for May demonstrated an unexpected decrease, while the growth of services, an otherwise promising sector in the uneven recovery, also showed signs of slowing down. This has been the slowest pace in four months. This raises concerns for investors hoping for a steady increase in China’s economic growth, post the lifting of COVID-19 restrictions in the previous year.

Economic strategist Michael Hewson from CMC Markets added that the economic damage caused by COVID-19 to the Chinese economy was far-reaching. The yuan hit its lowest point since last November when China was grappling with public health restrictions. Its value decreased by 0.5%, resulting in a 2.6% drop this month, following a series of weak readings from retail sales to industrial profits and loan growth.

Other assets sensitive to China’s economy were also affected. The Australian dollar hit a near seven-month low and crude oil and copper experienced a slump. European equities felt the pressure for the third consecutive day with stocks like LVMH, Burberry, and Swatch Group facing declines.

The U.S. dollar saw an upswing against a basket of currencies due to safe-haven flows in response to apprehensions around the U.S. debt ceiling. It is set for its most significant monthly gain since last September.

Meanwhile, Treasury yields fell in anticipation of an agreement to suspend the U.S. debt limit and prevent a default. Although the market is optimistic about averting a U.S. default, there is unease about the probable issuance of significant debt once the Treasury receives authorization to borrow.

In the commodities market, copper is heading for a second consecutive monthly drop following the Chinese data, while Brent crude oil maintained a steady level.

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