Possible Financial Market Stress and Yellen’s Warning on Debt Ceiling Increase

US Treasury Secretary Yellen says we are now seeing only the beginning of possible stress in financial markets. One can only partially agree with this, as some parts of the market (CDS, T-bills) have been nervous about fiscal risks for some time. However, where this certainly applies is in stocks, which indicate that they have begun to take the debt tussle seriously by politicians only when, despite many hopeful signs, a deal has not appeared.

Of course, Yellen once again warned about the consequences of the crash and called for an urgent agreement to increase the ceiling. She reiterated that the government could run out of money as early as June 1, that it was hard to say exactly when, but that she would provide regular updates. However, she did not want to communicate any scenarios for the case of an empty cash register. She limited herself to stating that the government would not be able to keep certain commitments and that it would face a difficult decision.

Partially negative news today was the May value of the German Ifo business climate index. There was a surprisingly large decline, driven mainly by worse expectations. However, the effect on overall sentiment is insignificant in our opinion.

In the evening, the minutes from the last meeting of the Fed’s monetary committee will come into play. He decided to raise rates by 25 bps, after which the markets reassured themselves that this was the last step in the cycle. However, after a few weeks, the idea of ​​another rate hike in June seems to be partially returning, with expectations for a rate cut by the end of the year less aggressive.

After yesterday’s losses, Wall Street continues to fall by another 0.8 pct, while the main European indices are already down by more than 2 pct. Bond yields initially fell, but after several changes in direction, they are very similar to last night. The Eurodollar has also changed direction several times, currently heading slightly down to 1.0760. Gold began to lose slightly. On the contrary, the koruna is taking away small profits from today.