Debt ceiling deal: will the U.S. stocks rally this week?

Republicans and Democrats have agreed on debt ceiling deal in principle.

Antonio Cavarero explains what it means for the U.S. stocks this week.

At writing, the benchmark S&P 500 index is already up 10% year-to-date.

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U.S. stocks will be in focus this week after Republicans agreed in principle with the White House to raise the debt ceiling.

The said development is a major step forward in preventing a default. Still, the Head of Investments at Generali Insurance Asset Management – Antonio Cavarero does not expect the S&P 500 to unlock a significant upside in response.

The scenario of an agreement was by far the centre scenario. Therefore, I would not be expecting a major relief rally. Most part of these good news were already in the prices.

Details of the debt ceiling deal are yet to be officially revealed. According to CBS, though, the U.S. government will likely keep its non-defense spending flat over the next two years.

At writing, the benchmark index is up 10% versus the start of the year.

On the flip side, the recent economic data has been positive for the U.S. stocks. Last week, the Fed’s preferred inflation gauge was reported to have eased further in April (find out more).

But the debt ceiling deal is still awaiting approval from a divided Congress that will remain the centre of attention for markets, Cavarero noted today on CNBC’s “Street Signs Europe”.

It’s possible that the market in the next few days will focus on execution risk – the fact that this agreement needs to be sealed down with proper laws and needs to find the votes.

The U.S. GDP was recently reported to have grown at an annualised pace of 1.3% in the first quarter.  

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