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Morning Market Review: Stocks Respond to Debt Deal, Turkish Lira at Risk

Good morning and welcome to Chump Profit's morning finance news review. Let's dive into today's top story: "Stocks Offer Small Gains in Response to Debt Deal: Markets Wrap."


Investors woke up to positive news as markets responded with cautious optimism to the debt-ceiling deal reached between President Joe Biden and House Speaker Kevin McCarthy. As a result, riskier assets received a boost, refocusing attention on the path for Federal Reserve hikes.


US and European equity futures delivered small advances, while Asian shares climbed approximately 0.5%. The S&P 500 and Nasdaq 100 contracts saw modest gains, with Japanese and Australian stock benchmarks exceeding 1%. However, shares in Hong Kong erased initial gains as momentum in the technology sector faded.


While gold remained flat due to waning demand for havens, oil and Bitcoin experienced gains, reflecting a mildly positive sentiment. The dollar's strength remained unchanged after reaching a two-month high last week, trading within tight ranges against major counterparts.


Treasury futures saw a slight decline, with US markets closed on Monday for a holiday, alongside the UK and some parts of Europe. Traders demanded less of a premium for holding US Treasury bills, indicating reduced concerns about non-payment if a deal is not reached in time.


Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, noted that the positive interpretation of the debt-ceiling deal is that a negative tail risk is close to being eliminated. However, he cautioned that the fundamental picture remains precarious and that the distraction of the debt ceiling needs to fade into the background for investors to refocus on underlying fundamentals.


The debt agreement, reached by Biden and McCarthy, is against the clock as Treasury Secretary Janet Yellen has stated that cash reserves will run out by June 5. The deal contains aspects that both Democrats and Republicans may not like. Suzuki warned of ongoing uncertainty regarding the duration and severity of the earnings recession and the potential worsening of near-term liquidity due to the government's need to address its debt issuance backlog.


Meanwhile, the rate-sensitive two-year Treasury yield remained steady as traders analysed how the debt agreement might impact the Federal Reserve's stance on interest rates. The two-year yield hovered around 4.65%, with the Fed still having work to do to bring inflation back to its target, as indicated by a faster-than-expected 0.4% rise in the personal consumption expenditures price index.


Looking at Friday's stock market performance, the S&P 500 rose by 1.3%, and the tech-heavy Nasdaq 100 added 2.6% following optimistic revenue projections from Marvell Technology Inc. and Nvidia Corp., both anticipating significant growth driven by demand in the artificial intelligence sector.


In other news, emerging markets will draw heightened interest as Turkish President Recep Tayyip Erdogan secured an election victory, which could potentially lead to more friction with Western governments and increased uncertainty for investors.

Morgan Stanley analysts, including Hande Kucuk and Alina Slyusarchuk, warn that the Turkish lira faces a potential 29% slump if President Recep Tayyip Erdogan continues his policy of keeping interest rates low. They predict that the lira could reach 26 per dollar sooner than expected and weaken further to nearly 28 by year-end. Erdogan's unorthodox approach to interest rates, driven by his belief in lower rates leading to lower inflation, has resulted in unpredictable ad-hoc regulations and interventions. This has caused foreign investors to withdraw, with foreign holdings of Turkish stocks and bonds decreasing by about 85%, approximately $130 billion, since 2013. The analysts stress the need for a change in Turkey's macro policy framework to prioritize disinflation and adopt market-friendly policies to mitigate macro risks and increase resilience to global shocks and FX inflows from regional partners.


That wraps up today's morning finance news review. We hope you found this update helpful and informative. Stay tuned for more updates throughout the day.

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