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Stocks Fall as Debt Ceiling Debate Looms and May Trading Month Ends

June 1, 2023

Stocks declined on Wednesday as investors closely watched the federal debt ceiling debate in Washington. The Dow Jones Industrial Average dropped 0.41%, the S&P 500 dipped 0.61%, and the Nasdaq Composite slipped 0.63%. A debt ceiling deal between President Joe Biden and House Speaker Kevin McCarthy progressed to the House floor, with a vote expected later in the day. While analysts anticipate the deal to pass, concerns remain about potential adjustments and the need for more time to reach an official agreement. Investors are also focusing on the upcoming June Federal Reserve policy meeting.

The May trading month concluded with mixed performance. The Nasdaq Composite experienced a 5.8% increase, driven by gains in artificial intelligence-related stocks and technology companies. Despite a temporary loss in month-to-date gains during Wednesday’s market sell-off, the S&P 500 closed the month with a modest 0.3% gain. In contrast, the Dow Jones Industrial Average declined by almost 3.5% in May, primarily due to significant losses in several major companies, including Nike, Walt Disney, Walgreens, 3M, Chevron, and Dow, Inc. Investors are taking precautionary measures ahead of the debt ceiling vote, securing profits before potential market volatility.

Data by Bloomberg

On Wednesday, the stock market experienced a mixed performance across different sectors. The Utilities sector showed a gain of 0.96%, followed by Health Care with a positive movement of 0.85%. Real Estate also saw a modest increase of 0.66%, while Consumer Staples had a slight gain of 0.07%. However, there were declines in various sectors, with Energy being the hardest hit, dropping by 1.88%. Industrials experienced a decline of 1.40%, followed by Financials at -1.14%. Information Technology and Materials both had significant losses, with decreases of 1.09% and 1.12% respectively. Consumer Discretionary also showed a negative trend, declining by 0.92%. Communication Services had a slight decrease of 0.05%. These variations reflect the sector-specific performance and market dynamics observed on Wednesday.

Major Pair Movement

On Wednesday, the dollar index saw a 0.25% increase as EUR/USD declined by 0.56% due to indications of reduced need for rate hikes by the European Central Bank (ECB). Additionally, unexpected growth in U.S. job openings initially boosted the dollar, although concerns about overstating labor tightness and a negative miss in economic data tempered expectations for a June rate hike by the Federal Reserve (Fed). The dollar and yen benefited from derisking flows, while the euro, yuan, and China-linked currencies faced the most significant impact.

The market is closely monitoring the upcoming payrolls report on Friday, as it could influence the timing of rate hikes between June and July. The Fed and ECB are expected to raise rates by 25 basis points (bp) and 50bp, respectively, but the exact timing will depend on economic indicators. The yield curve inversion and hawkish Fed news weighed on banking stocks, although losses were mitigated by less hawkish signals from the Fed. EUR/USD hit a low not seen since March 20, and traders are eyeing a potential retest of 2023’s lows near 1.05. USD/JPY retreated after a brief rebound, and sterling recovered from earlier declines, posting a 0.17% increase.

Key highlights for Thursday include ADP employment data, jobless claims figures, and the ISM Manufacturing Index.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Plunges Amid Souring Sentiment and US Debt-Limit Concerns

The EUR/USD experienced a sharp decline on Wednesday as risk aversion prompted an increased demand for the U.S. dollar against higher-yielding currencies. The pair reached a low of 1.0658 during the European session but managed a slight recovery to trade at 1.0685. Investor concerns revolved around the U.S. debt-limit bill, which President Joe Biden and House Speaker Kevin McCarthy reached a deal on Sunday. The bill faced doubts from representatives of both ruling parties, needing to make progress within the next 24 hours. Additionally, Chinese economic data, including a contraction in the NBS Manufacturing PMI, added to the negative sentiment. The European session revealed a decrease in German inflation, further highlighting easing price pressures in the Eurozone. Market participants will await the release of the U.S. Chicago Purchasing Managers’ Index and JOLTS Job Openings later in the day, along with insights from Federal Reserve officials, as they anticipate the central bank’s upcoming monetary policy meeting.

Chart EURUSD by TradingView

According to technical analysis, the EUR/USD pair is moving lower on Wednesday, creating a push for the lower band of the Bollinger Bands. Currently, EUR/USD moving back higher and trying to reach the middle band of the Bollinger bands. We are expecting that the EUR/USD will continue its upward movement today and try to reach the upper band of the Bollinger Bands. The Relative Strength Index (RSI) is currently at 43, indicating that the EUR/USD has returned to a neutral position.

Resistance: 1.0711, 1.0761

Support: 1.0655, 1.0636

XAU/USD (4 Hours)

Gold (XAU/USD) Holds Gains as Risk Aversion Persists Amidst Concerns over US Debt Ceiling

Gold prices (XAU/USD) continued its weekly rally, reaching $1,974.76 per troy ounce, its highest level in a week. XAU/USD is trading around $1,965, retaining its gains amidst a general aversion to risk. The market sentiment turned negative on Tuesday and remained subdued on Wednesday due to lackluster Chinese data and uncertainty surrounding the US debt ceiling bill. In addition, the April JOLTS Job Openings report showed a robust job market, leading market participants to factor in a 71% probability of a 25 basis points rate hike at the upcoming June Fed monetary policy meeting. The strengthening US Dollar against major currencies, driven by a decline in stock markets, caused XAU/USD to retreat slightly from its peak. However, thanks to its safe-haven status, gold maintained a significant portion of its intraday gains. The US debt-ceiling bill has made progress, passing the House Rules Committee and moving into Congress, with Senate Majority Leader Chuck Schumer expressing the intention to expedite its floor vote in the Senate.

Chart XAUUSD by TradingView

According to technical analysis, the XAU/USD is moving higher on Wednesday, reaching the upper band of the Bollinger Bands and break our previous resistance level at $1,962. There is a possibility that the XAU/USD will make a slight downward movement and return to the middle of the Bollinger Bands for today. Currently, the Relative Strength Index (RSI) stands at 56, indicating that the XAU/USD is in a neutral position but slightly bullish.

Resistance: $1,972, $1,991

Support: $1,953, $1,934

Economic Data

CurrencyDataTime (GMT + 8)Forecast
EURCPI Flash Estimate17:006.3%
USDADP Non-Farm Employment Change20:15173K
USDUnemployment Claims20:30236K
USDISM Manufacturing PMI22:0047.0

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