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Debt Ceiling negotiations continue to dominate sentiment

Commentaries & Views

From an economic data perspective, the main focus on Tuesday will be the flash PMI readings from across Europe.

The looming shadow in the background is the cautious sentiment encouraged by the ongoing standoff in Washington when it comes to the debt ceiling talks. There might very well be fatigue in news headlines already, but the debt ceiling negotiations are dominating everything from a theme perspective.

As it stands, investors still refuse to realistically price in the prospect that the United States will run out of money within ten days from now. This is because everyone is in on the act and aware that what is taking place within Washington at the moment is just a political drama. With that being said, it is not helpful to sentiment and the situation overall is bringing more uncertainty to the mind of investors when they are already puzzled over more than enough matters. Such as issues lacking clarity including the future outlook of global interest rate policy and whether inflationary pressures will truly ease over the second half of this year.

It would not be a surprise if the repeat of comments from former Fed Chair and current US Treasury Secretary Janet Yellen that it is highly likely that the United States government will run out of cash by June rings in the ears of traders today. 

This means that a cautious trading atmosphere can be expected. 

Oil above $72 but unlikely to climb much more

Oil prices find themselves stuck between a rock and a hard place when it comes to looking at potential risks for the remainder of the month.

This is because even though the debt ceiling talks and the unlikely prospect of the United States government running out of cash does not initially impact demand, Oil is a risky asset to hold in an investor portfolio and should traders get worried as the June 1 deadline approaches, we can expect for Oil to be one of the first items thrown out of the window.

Oil very much is and will always be considered as a risky asset and this means that the probability of a risk-off atmosphere over the coming sessions will limit how much further Oil prices can stretch beyond $72. 

From a technical perspective of price action, $70 is looked at as a support cushion but this is unlikely to stay in place for long should investors begin to get worried about the events taking place within Washington. 

At the same time, the macroeconomic backdrop of waiting for data announcements to show us what the future outlook for the world economy will be as interest rate increases filter through economies as we wait for inflationary pressures to hopefully decline suggests that Oil price action should not be able to move much higher than where they currently stand.

The uncertain macro backdrop and what implications this might have for future demand for commodities such as Oil is also why we must be realistic that even if financial markets rally on the news of a breakthrough to the ongoing debt ceiling negotiations, Oil price rallies will be contained.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.