S&P 500 up 1% on hopes for Washington breakthrough

The stock market climbed on speculation that a narrower group of Washington negotiators will break a deadlock on raising the US debt ceiling and avoid an unprecedented default, Bloomberg reported.

Equities halted the recent trading lull, with gains in the S&P 500 topping 1% and the Nasdaq 100 hitting the highest since August. Treasuries dropped, with yields on 10-year notes approaching 3.6%. President Joe Biden expressed confidence there will be no default, and House Speaker Kevin McCarthy said reaching an agreement this week is “doable.”

“We don’t want to get too excited as the two sides reportedly remain far apart,” said Win Thin, global head of currency strategy at Brown Brothers Harriman. “However, we get the sense that there is a real effort to avert a debt ceiling catastrophe as the X-date of June 1 is fast approaching. Stay tuned.”

JPMorgan Chase & Co.’s chief Jamie Dimon said the US government “probably” will not default on its debts. He joined other top executives of major banks in a meeting with Senate Majority Leader Chuck Schumer to discuss the debt limit.

The Treasury’s cash balance rose to $94.6 billion as of May 16, according to data published Wednesday. That’s up from from $87 billion a day earlier and compares with $140 billion at the end of last week. The Treasury’s bank account has been under downward pressure recently because of measures being taken to avoid breaching the $31.4 trillion debt cap.

“We all know the US Treasury is about to run out of ways to pay its bills, but we have seen this movie too many times before,” said Chun Wang at Leuthold Group. “While, theoretically, there is a threat of default, we certainly don’t recommend planning our lives around it. The script is very predictable: political posturing and grandstanding will go on until the 11th hour, and then a deal will be hastily put together to avoid a default.”

Uncomfortably Similar

If history is any guide, the debt-ceiling turmoil tends to be short-lived, without much impact on stocks before or after a resolution, Wang added. However, the August 2011 instance caught many investors by surprise, with equities slumping for a week or so before stabilizing. Assuming the date of resolution is June 1, the current pattern is “uncomfortably similar to August 2011,” he noted.

To Amy Wu Silverman at RBC Capital Markets, while markets are betting on a rocky end to the debt-ceiling debate, if they are wrong, investors may miss out on the gains.

“The tale of optimism does not exist,” she told Bloomberg Television. “Is there a possibility of a congressional miracle? If it at all comes in a little bit easier than we expect, that right tail is very cheap.”

Also helping sentiment Wednesday was a rally in regional banks after Western Alliance Bancorp reported growth in deposits, easing worries about the health of the industry.

In late trading, Cisco Systems Inc. dropped after the networking company reported its third-quarter results and gave an outlook. While the report was better than expected overall, Vital Knowledge noted some weakness in underlying numbers.