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[ANALYSIS] The US debt ceiling and local bourse performance

Den Somera

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[ANALYSIS] The US debt ceiling and local bourse performance

Raffy de Guzman

What is the US debt ceiling, and why is it that so important it is bogging down even other markets like ours?  And even if a deal is arrived at to avert a default, why should it not be a cause for rejoice? 

In my article last week, I pointed out the market made at least three attempts to climb higher after it managed to break out on April 28 at its immediate resistance level of 6,600.  

The first attempt happened a week after, wherein it successfully advanced by some 84 points or so.  This was followed by two other advances in descending order in the next three weeks.  In between these advances, the market was always pushed back to linger just above the 6,600 level.  All these times, trading volume and value turnover were thin and low.  

I also pointed out that seasoned traders normally interpret this kind of trading results as tacit signs of a market breakout that is bound to fail. 

Funny, I was blindsided by the optimist in myself to make the fearless forecast that the market – despite the telltale signs of a breakdown – will make an upward bias by the week’s end.  But as you will remember, the market even fell lower on Friday last week.  

My justifications, if you still also remember, were the following: Because total value turnover on May 22 and 23 substantially increased, I totally ignored the fact that on both days the market ended in negative territory.  Likewise, I dismissed the sharp decrease in total value turnover on May 24 and gave more weight to the slight advance made by the market at the end of the day.  Lastly, I opted to accept positive but speculative future events from negative realities of the present.  

To recall, I gave undue weight to what I said then as “…anticipated positive leads and events” versus the obvious faltering trading advance of the market due to weakening trading volume and diminishing total value turnover.  

In other words, I went against – and did the reverse of – the market saying which says, “A bird in hand is worth two in the bush.” 

Actually, one of the anticipated positive events I was looking at was the inevitability of a compromise deal in the US debt ceiling issue.  I believed the White House and Republicans will eventually suspend or raise the debt ceiling.  And that development alone should be strong enough as a catalyst to prop up the market.  But as it appears now, it’s not working as I imagined.  

The US debt ceiling deal and why it is said to be not a cause for rejoice 

What is the US debt ceiling, and why is it that so important it is bogging down even other markets like ours?  And even if a deal is arrived at to avert a default, why should it not be a cause for rejoice? 

The debt ceiling is the amount of money the US government is authorized to borrow to pay its bills.  Paramount to these obligations include payment of Social Security and Medicare benefits, tax refunds, military salaries, and interest payments on outstanding national debt. The current ceiling is about $31.4 trillion.  This borrowing limit has been hit by the present administration in January.

The US Congress has raised or suspended the debt ceiling in the past.  However, if no action is done on time, a default could actually happen. 

Moody’s study claimed that an economic downturn triggered by a US default may even overshadow the global financial crisis of 2008.  It also claimed that as many as 7.8 million jobs could be lost, and stocks would fall by almost a fifth, erasing $10 trillion in US household debt. The contagion would spread to global markets, it added.

As of this writing, the White House and Republicans have essentially reached a deal to raise the debt ceiling, and avert the occasion of a default.  While this is hailed as good news, this is not the end of the woes besetting the stock market.   It has to buckle up further for a potentially rough ride, according to another commentary.

It is anticipated the US Treasury will immediately replenish the cash it burned during the period of when it could not borrow more money. This will create more competition for the equity market.   

Based on government debts issued for the purpose, investors will find US Treasuries better than stocks. That will temporarily suck some liquidity out of the stock market, the commentary further added.

In addition, the market still has a potential recession to prepare for.  Some estimates claim the US economy has a “68% probability of going into recession in the next 12 months.” 

Traders market outlook

In the face of the market’s difficulty to break out beyond its current resistance zone, it seems that it must still have to undergo further consolidation.  Both local and foreign investors have been engaging in booking small gains as a trading norm under the market’s present nebulous situation. 

Joey Roxas, president of Eagle Equities, Incorporated, believes the market is waiting for new catalysts to move the market.  

Joel dela Pena, market strategist and chief trader of H.E. Bennett Sec., also believe that this is what the market needs. Likewise, Dela Pena is anticipating that some significant amount of the Maharlika Investment Fund (MIF), also known as the Maharlika Wealth Fund (MWF), may soon find its way into the local bourse.

In the meantime, I’d like to congratulate Jofer Gaite, for his appointment as the new president and nominee of Westlink Global Equities, Incorporated. –

(The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise.  Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity.   You may reach “Thin Slicing” at  

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