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WALL STREET EDGE HIGHER BUT RISING CONCERN OVER DEBT CEILING


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Sentiment across Wall Street is very much up. Ultra-low interest rates, along with the highest percentage of companies in the S&P 500 beating analyst expectations since at least 1994, have pushed the S&P 500 up 17.2% for the year to date. The S&P 500 now trades at 21.7 times its expected earnings over the next 12 months, down slightly from the 24 times expected earnings at the start of the year yet still well above its historical average. Meanwhile, the tech-heavy Nasdaq Composite underperformed its peers, falling almost 100 points to around 14,820. The Dow added 0.3% this week. The S&P and Nasdaq 100 rose 0.5% and 0.6%, respectively.

Investor’s confidence get booster as the American economy witnessed the strongest job growth since last August pushing unemployment to 5.4%, the lowest since March 2020. The Labor Department's closely watched employment report showed nonfarm payrolls grew by 943K, the most in eleven months and easily beating market expectation, suggesting the labour market's recovery is picking up steam.Investors will also get additional insights into the pace of inflation with the release of the consumer price index reading on Wednesday and the producer price index on coming Thursday.

Key Concerns:

Though the economic boost from an expected $1 trillion infrastructure bill working its way through the U.S. Senate has helped push Wall Street stocks near record levels, but some investors are concerned that the next two months in Washington could be rocky. Also political posturing around the debt ceiling could escalate ahead of the 2022 Congressional elections, and that the reconciliation bill could boost corporate or individual tax rates, weighing on investor sentiment.At issue is not only the bipartisan infrastructure bill, but an expected $3.5 trillion in proposed spending in a Democrat-led reconciliation bill. There is also a showdown coming over the debt ceiling, which could lead to a federal government shutdown if a deal is not reached to increase the borrowing limit by October.

Few expect the U.S. government will default on its debt and upend the $22 trillion Treasury market. Still, some analysts say a drawn out debt ceiling fight could increase volatility in a U.S. stock market where valuations have become stretched with prices near record highs. Other worries include a looming unwind of the Federal Reserve’s easy money policies and a resurgence of COVID-19 that threatens to dent growth.

The rising sense of concern comes as investors anticipate possible further details on plans to pull back emergency-level supports of the economy from the Federal Reserve at the Jackson Hole annual conference of central bankers surprisingly hawkish turn from the Fed in June led to a brief selloff in equities and the fixed income market.

Bond Yield:

The yield on the benchmark 10-year Treasury note advanced to 1.277% on Friday, as risk sentiment improved after a stronger-than-expected US jobs report. Earlier in the week, yields were little changed near 5-1/2-month lows on the back of a poor ADP employment report and weak factory activity data. On the coronavirus front, the US has reported on average 72,000 new Covid cases a day in the last 7 days, the most since February.





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