NEW YORK, May 29 (Reuters) - US President Joe Biden and Republican Congressman Kevin McCarthy arereacheda tentative deal to suspend the federal government's $31.4 trillion debt ceiling, ending a months-long stalemate.
But the deal still faces a tough road through Congress before the US runs out of money to pay its debts in early June.
EDWARD MOYA, SENIOR MARKET ANALYST AT OANDA IN NEW YORK
"Downgrade risks are still there. It's important that lawmakers take this seriously and not act or try to please their bases.
"The dollar is still the reserve currency, but it will lose some of that status."
STEVEN RICCHIUTO, GLAVNI EKONOMIST SAD-a U MIZUHO SECURITIES USA LLC, NEW YORK.
"The importance of crossing the debt limit is critical. They all want to get it out past the election process and they got a spending freeze, which creates a real drop in a number of spending programs. Radicals on every side will not vote for this, the people are in the middle.
ANDRZEJ SKIBA, MANAGER OF BLUEBAY U.S. FIXED INCOME IN RBC GLOBAL ASSET MANAGEMENT, NEW YORK.
"There should be enough support on both sides of the aisle to get the deal approved first in the House and then in the Senate. It seems like a race against time before the June 5 deadline, but it needs to be done in time. It will be noisy, but finally the default value should be avoided.
"What is more important is that the deal, as proposed, prevents a repeat of the debt ceiling drama until the next election. After a series of tumultuous weeks, most will see this as the biggest achievement.
"The prospect of Treasury bill defaults should disappear. Money market funds may stop worrying about which securities they hold, and yields on short-term maturities should normalize.
"On the other hand, we should now expect an avalanche of Treasury bill issuance over the coming weeks as the government fills its coffers. This withdrawal of liquidity from the market is largely expected, but could still affect the valuation of US government fixed income securities." papers."
KHOON GOH, VODITELJ ASIA RESEARCH, ANZ, SINGAPUR:
"The markets have already responded positively to the deal. Of course, there are still a few hurdles to clear... and there is still the potential for some key in the works, but for now the markets are working on the assumption that the deal will go through and have already moved on from that.
"For the dollar, it's a bit of a mixed bag. We've seen the dollar strengthen over the last few weeks as a result of the debt ceiling uncertainty. The dollar has managed to stay pretty strong even as the deal has been announced. I think that's partly because it's getting some support from increased expectations of a June hike, and markets are also focused on a major issue to be issued by the US Treasury once the deal is signed in. This could potentially reduce liquidity in the short term which could keep US yields elevated and thus help support the dollar in the short term.
"The markets are pricing in the deal as if it's going to be passed, so that's the risk we're facing right now if, for whatever reason, the deal doesn't get passed ... especially if it doesn't get passed by the time X-date is due. .. then the rally we saw late last week and so far early today will definitely unravel and lead to a major selloff."
BOB STARK, GLOBAL HEAD OF MARKET STRATEGY, KYRIBA,
"While the White House debt ceiling deal is great news, the US government still has a cash flow problem and time is of the essence to finalize the deal. The debt ceiling deal is just the first step in saving the government from the brink of insolvency."
"Markets have already priced in a deal this weekend. What investors will be focusing on now is the cost of the spending cuts to the health of the US economy. What effect will these spending cuts have on GDP and economic growth?"
"Corporate CFOs are already updating their cash forecasts to account for the cost of this debt ceiling deal, trying to project the impact of the spending cuts on their own organization's financial projections. How many businesses will be adversely affected by the deal? The cost of what Democrats gave up in order to extended the debt ceiling for two years will be felt for the next decade as the US economy struggles to get back into balance."
"One immediate benefit on Monday is that short-term Treasury yields will begin to return to normal, while U.S. Treasuries and T-bills can return to risk-free status and provide certainty for investors and the American people."
STUART KAISER, HEAD OF EQUITY TRADING STRATEGY, CITI, NEW YORK:
"The agreement on the debt ceiling removes a minor risk to economic growth, but does not significantly change the basic case. As a result, it is modestly positive for equity markets at the index level, but progressively more positive for areas such as thin balance sheet stocks, small caps and perhaps cyclical markets. They have been worse recently and have more exposure to growth and credit risk.”
DAMIEN BOEY, GLAVNI MACRO STRATEG, BARRENJOEY, SYDNEY:
"We will get optimism that a deal is done and that a real crisis has been avoided, but at the same time a frightening outflow of liquidity. The net effect is ambiguous, but I think you will find that the volatility of interest rates(.MOVE)will rise, and that will cause growth in banks and non-AI stocks to slow."
MOH SIONG SIM, CURRENCY STRATEG, BANKA SINGAPURA, SINGAPORE:
"The deal still needs to be passed by both the House of Representatives and the Senate. Assuming the agreed spending cuts do not have a material impact on US growth prospects, the debt deal should be both a risk and a positive in the US dollar.
"The need for the Treasury to replenish its cash could reduce liquidity."
VISHNU VARATHAN, ŠEF EKONOMIJE, MIZUHO BANK, SINGAPORE:
"There may be an initial sliver of relief that could lead to a little lower yields along with some strength in the US dollar, along with stocks. But the vagaries of pushing a deal through Congress could prevent it.
In addition, the overriding liquidity-draining implications of issuing cash to bolster very low Treasuries can perversely raise yields and weaken stocks. The dollar, however, could be offered."
THIERRY WIZMAN, GLOBAL FX AND INTEREST RATE STRATEGIST, MACQUARIE GROUP, NEW YORK:
"There will certainly be relief in the fixed income markets. Where there has been the most distortion due to uncertainty has been in the credit markets and the Treasury bill market...I think on Tuesday when the market reopens in the US, we should see that those two distortions are fixed.
"But what this doesn't address is that all along the Treasury curve, yields have gone up recently. And I think they've gone up in anticipation of a lot of Treasury bond and bill issuance in the next few weeks. Because the U.S. Treasury has to renew its cash in. And therefore, I think Treasury bond yields will remain high for some time while that supply is absorbed.
"And I think stocks can do well here. This was certainly one overhang on the stock market.
"On the dollar side, I'm inclined to think that it might strengthen the dollar a little because it will weaken the case for de-dollarization. But not much, just a little more, because the dollar has already strengthened quite a bit in the last few weeks."
AMO SAHOTA, REDATELJ, KLARITYFX, SAN FRANCISCO:
"This is going to be pretty good for the market. I think it's going to keep expectations still pretty hot with how the Nasdaq is doing. It's going to be good for stocks.
"I think it could also give the Fed more reason to feel confident about trying to raise rates again. I think the market could actually take the opportunity to tighten rates a little bit more in June if they think that all else being equal, the economy is still always pretty hot. We can see that, especially the uptick in the technology sector. Spending has also been pretty strong.
"I think this holds up the dollar pretty well as well. I think, overall, everyone should be pretty happy with this, although we want to see what the color of the deal looks like. Initially, this seems to come more than cuts, which is really what the as soon as the Republicans advocated.
"It will be important to see how long the contract lasts, if we will... face the same problems again. Or will these things also be resolved with a long-term contract. I am very confident, very doubtful that it is a long-term contract."
Reporting by Laura Matthews in New York, Rae Wee and Tom Westbrook in Singapore; Compiled by a team of breaking news on global finance and markets; Editing by Kim Coghill and Andrea Ricci
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