On Monday, May 26, the Australian dollar surged past the 0.65 mark against the US dollar, reaching 0.6505—its highest level since May 7. The Aussie has strengthened nearly 0.7% over the past week, supported by a weakening greenback, rising commodity prices, and renewed risk appetite in global markets.

The US dollar has dropped over 1% this week, on track for its largest weekly decline since early April. Investor sentiment toward the USD has deteriorated amid concerns over ballooning US fiscal deficits. The passage of a major tax cut and spending bill in the House—expected to add $3–5 trillion to the national deficit—has intensified scrutiny. Moody’s recent downgrade of the US credit outlook further pressured the greenback.

Meanwhile, commodity prices remain resilient. Gold has surged above $3,320/oz, and industrial metals like copper and iron ore continue to find support—benefiting export-driven currencies like the Aussie.

Analysts say the technical break above 0.6500 could pave the way toward the next resistance zone near 0.6550. Market focus now turns to upcoming economic data from China, the Reserve Bank of Australia’s policy stance, and shifting expectations around a potential Fed rate cut later this year.

The Australian dollar saw a significant surge today, driven by several key factors:

Weak U.S. Economic Data: The latest U.S. retail sales report showed a sharp decline, marking the biggest drop in nearly two years. This led to a decrease in the U.S. 10-year Treasury yield to 4.48%, narrowing the gap with the Australian 10-year yield (4.45%). As a result, investor confidence in the USD weakened, prompting a shift towards the AUD.

Adjustment in RBA Rate Cut Expectations: While the Reserve Bank of Australia (RBA) recently implemented a rate cut, Governor Michele Bullock stated that it is too early to declare victory over inflation. This cautious stance has strengthened market confidence in the Australian dollar.

Strong Australian Economic Data: Recent reports showed that Australia added 44,000 jobs last month, far exceeding the expected 19,400. Full-time employment also increased by 54,100, highlighting the strength of the labor market, further supporting the AUD.

Optimism Over U.S.-China Trade Relations: Former U.S. President Donald Trump recently suggested that a new trade deal between the U.S. and China could be possible. This has fueled hopes for an improved global trade environment, benefiting trade-driven economies like Australia and boosting the AUD.

In summary, shifts in global economic data, adjusted central bank policy expectations, and positive trade outlooks have collectively driven today’s strong rally in the Australian dollar.

The Australian dollar stabilized above $0.62 on Tuesday, recovering from multi-year lows reached in the previous session, following U.S. President Donald Trump’s decision to postpone tariffs on Mexico and Canada for a month after successful negotiations with their leaders.

Despite this, the planned U.S. tariffs on China are still set to take effect later today.

Trump is scheduled to meet with Chinese President Xi Jinping this week, as both sides aim to reach a deal and avoid a broader trade war.

In Australia, investors are awaiting December trade figures, due on Thursday, to assess the strength of the country’s export-driven economy.

Market sentiment is leaning toward expectations that the Reserve Bank of Australia may begin cutting interest rates this month, amid easing inflation and signs of slowing economic activity.

(From Trading Economics)

The Australian dollar has rallied during the course of the week to reach toward the 0.64 level, an area that’s been important more than once. If you look at the daily chart, it’s also where the 50-Day EMA is currently hanging about, so it all comes together. The resulting candlestick for the week is an inverted hammer, which could be a very negative turn of events, but if we do break above the top of it, extensively the 0.64 level, then you have the possibility of moving to the 0.65 level, and then eventually the 0.66 level where the 50-Week EMA currently resides. (The 200-Day EMA currently resides on the daily chart as well.)

If we break down below the lows of the last couple of weeks, it opens up the possibility of the move down to the 0.62 level, and then after that the potential move of the Aussie down to the 0.60 level. Keep in mind that the market is very sensitive to risk appetite, as the Australian dollar is not only a commodity currency, but it’s also a currency that banks on growth in Asia and the globe in general.

Ultimately, I do expect to see a lot of noisy trading, but you still have to assume that the downside is the best way to go. Picking up “cheap US dollars” will continue to be the way most traders are paying attention to, and therefore I think you’ve got a situation where the market is going to continue to see significantly downward momentum, and eventually something will probably break. It is not until we break above the 0.66 level that I would consider buying.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

EUR/USD FORECAST – TECHNICAL ANALYSIS
EUR/USD rebounded on Thursday after a subdued performance during the previous trading session, but gains were capped by soaring U.S. Treasury rates, a hostile market environment that appears to have prevented the pair from clearing technical resistance around the 1.0600 handle.

With U.S. yields on a bullish tear and geopolitical tensions in the Middle East on the rise, the euro will struggle to maintain a sustained upward course. This means that the direction of travel is likely to be lower for the exchange rate.

In terms of technical analysis, if EUR/USD fails to push higher and resumes its decline, we could see a move towards trendline support at 1.0500. This floor could provide stability and ease the selling pressure, but if it caves in, prices could be on their way to the 2023 lows at 1.0448. On further weakness, the focus shifts to 1.0350.

Conversely, if sentiment shifts in favor of the bulls and EUR/USD takes out overhead resistance at 1.0600/1.0625, buyers may regain control of price action, paving the way for a rally towards 1.0765, the 38.2% Fibonacci retracement of the July/October slump.

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EUR/USD TECHNICAL CHART
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USD/JPY FORECAST – TECHNICAL ANALYSIS
USD/JPY lacked directional conviction on Thursday, despite the surge in U.S. rates. While rising U.S. Treasury yields offered support to the U.S. dollar, the yen experienced heightened demand due to escalating geopolitical tensions in the Middle East. This juxtaposition created a neutral trading environment for the exchange rate. Although both the yen and the U.S. dollar are commonly perceived as safe-haven assets, the yen tends to be favored during periods of elevated market uncertainty.

From a technical analysis perspective, USD/JPY remains firmly entrenched in a robust uptrend, although it appears to be undergoing a phase of consolidation at the moment. In any case, caution is warranted given the pair’s proximity to the critical 150.00 level. In 2022 and 2023, the Japanese government took steps to defend the country’s currency against further depreciation when this threshold was breached.

In the event that Tokyo decides not to intervene for now and USD/JPY breaks above 150.00 decisively, upward momentum could gather pace, setting the stage for a rally towards the 2022 highs at 151.95. On further strength, the bulls may muster the impetus to challenge channel resistance near 152.30.

On the other hand, if prices get rejected lower and initiate a pullback, initial support is found within the range of 149.25 to 148.90. Clearing this floor might attract fresh sellers to the market, creating favorable conditions for a potential descent toward 147.30, followed by 146.00.

From Diego Coleman

AUD/USD, GBP/AUD PRICE, CHARTS AND ANALYSIS:RBA Downgrades Growth Forecasts for 2023.

Markets Pricing in a 50-50 Chance of a Further Rate Hike by the Central Bank in Q4.
China Lifts Barley Tariffs in Another Step Towards Trade Normalization Between the Two Countries.

AUD FUNDAMENTAL BACKDROP
The Australian Dollar continued its recovery overnight with modest gains against both the Greenback and the GBP. The week thus far has proven to be another challenging one for the AUD following a continuation of the pause in rate hiking cycle by the RBA on Tuesday which weighed on the currency.

Yesterday saw the AUD regain some strength and arrest its recent slump finishing the day up 0.2% against the US Dollar. The move in part came down to a slightly weaker US Dollar as well as a wee bit of Australian Dollar strength which saw GBPAUD retreat from the fresh YTD high around the 1.9480 mark. Looking at the currency strength chart below we can see AUD is leading the charge this morning with the US Dollar in particular struggling as we do have NFP and Jobs data ahead later in the day.

The RBA Monetary Policy Statement this morning revealed the Central Bank contemplated a rate hike at this week’s meeting but felt that consumers and households were already experiencing a “painful squeeze” further cementing the case for a pause. The RBA stressed that this would also provide more time to assess how the how the economy and risks to inflation and employment were evolving. Inflation remains the Central Banks key focus moving forward with positive signs in the offing. Markets are still pricing in a 50-50 chance of one more rate hike in Q4 as services inflation remains elevated and productivity growth lags.

Economic growth forecasts have been downgraded with the Central Bank now expecting growth of just 0.9% in 2023 compared with the previous estimate of 1.2%. Other notable forecasts from the RBA included headline inflation at 4.1% by the end of this year, down from the previous forecast of 4.5%. The RBA does expect inflation to remain sticky in 2024 before easing back to 2.8% by end of 2025 which could mean higher rates are here for a sustained period of time, something which has been echoed by other Central Banks as well. Key uncertainties cited include Australia’s biggest export market China, household consumption, inflation getting more persistent than expected and goods prices declining significantly.

In positive new China have decided to drop anti-dumping tariffs on its barley imports with the Australian Government using the opportunity to call for an end to remaining trade restrictions. This could be a big win for the Australian Government as annual trade was once as high as A$1.5 billion ($986.25 million) and follows on from the resumption of trade in products like coal and timber as the trading partners continue their attempts to normalize commercial ties.

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EVENT RISK
Later in the day US NFP and Jobs date could have an impact on AUDUSD as another positive and forecast beating NFP print could see the Dollar Index (DXY) continue its advance. The NFP print may be overshadowed by average hourly earnings however, as wage growth has proven a key component of inflationary pressure around the developed world in 2023. A positive and forecast beating print could in theory scupper any attempts of a recovery in AUDUSD.

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TECHNICAL OUTLOOK AND FINAL THOUGHTS
The technical outlook on AUDUSD testing the lower end of the symmetrical triangle pattern in play with a bounce from here needing to clear immediate resistance around 0.6600. A break above could bring a retest of the MAs with the 50, 100 and 200-day MAs all resting around the 0.6700 and could make a sustained recovery difficult.

Looking at IGCS IGCS shows retail traders are currently LONG on AUD/USD, with 83% of traders currently holding LONG positions. At DailyFX we typically take a contrarian view to crowd sentiment, and the fact that traders are long suggests that AUD/USD may enjoy a short bounce before continuing lower toward the support area around 0.6450 (May Swing Low).

If you would like to learn more about trading triangle patterns download the Free Guide Below.

GBPAUD has been on a tear since September 2022 with higher highs and higher lows since making its way toward the long-term descending trendline around the 1.9600 mark. This week has seen a fresh YTD high printed yesterday before a sharp pullback leaving the pair at a key support area around 1.9350.

There is a possibility for a deeper correction here, but the bullish trend remains strong with the Fundamental outlook likely to keep the GBP on the front foot for now.

Key Support areas which could come into play include the 50-day MA at 1.9180 before the psychological 1.9000, which could hold the key for bulls to retain control. On the upside yesterday’s highs will be the first area of focus before the descending trendline around the 1.9600 handle may finally be reached.

Written by: Zain Vawda, Markets Writer for DailyFX.com

Australian Dollar, AUD/USD, RBA, China Caixin PMI, Crude Oil, Gold – Talking Points
The Australian Dollar failed to capitalise on a lift in market sentiment
China – US relations continue to improve while Caixin PMI added to the positivity

The Australian Dollar found firmer footing before retreating today with growth-orientated assets generally moving higher to start the week.

Australian building approvals for May rose by a whopping 20.6% month-on-month, well above the 3.0% anticipated and -8.1% prior.

Interest rate markets are placing a low probability of a hike from the RBA tomorrow, but these numbers could spice up the monetary policy meeting. The Aussie Dollar bumped higher on the news but struggled to run on with it.

APAC equities are a sea of green, following on from Wall Street’s solid gain seen on Friday. Some positive economic news out of North America gave markets the boost ahead of a holiday-impacted start to the week there.

Today, China’s Caixin PMI manufacturing data also added to the uptick in mood, coming in at 50.5 rather than the 50.0 forecast.

Washington announced that US Treasury Secretary Janet Yellen will visit China this week in further signs of a potential thawing in the sometimes-frosty relationship between the two largest economies.

Crude oil has had a quiet session as it continues to recover from a test lower last week. The WTI futures contract is near US$ 70.50 bbl while the Brent contract is a touch above US$ 75 bbl.

Likewise, spot gold has barely moved as it trades near US$ 1,920 at the time of going to print. Higher Treasury yields seen on Friday might undermine the precious metal if they continue north.

Looking ahead, a series of European PMIs could hold the market’s attention ahead of US ISM manufacturing figures. The full economic calendar can be viewed here.

AUD/USD remains range-bound today after failing to penetrate breakpoint support levels toward the end of last week.

Those levels at .6574 and 0.6565 might continue to provide support ahead of the late May low of 0.6458.

Further down, support may lie at the prior low of 0.6387 and the nearby Fibonacci level of 0.6381. The latter is the 78.6% Fibonacci Retracement of the move from the low of 0.6170 to the peak of 0.7158.

On the topside, resistance could be at a potential breakpoint resistance zone in the 0.6800 – 0.6820 area.

Further up, resistance could be at the previous peaks of 0.7011 and 0.7030 ahead of a cluster zone in the 0.0.7137 – 0.7157 area.

— Written by Daniel McCarthy, Strategist for DailyFX.com

CHINESE YUAN (CNH) NEWS AND ANALYSIS
US-China relations take a step backwards and markets rue lack of stimulus
USD/CNH rises back to near overbought territory despite near-term USD consolidation
GBP/CNH soars well into overbought territory but interest rate differentials support bullish continuation nonetheless
The analysis in this article makes use of chart patterns and key support and resistance levels.

Already fragile US-China relations took a step backwards yesterday after U.S. President, Joe Biden’s insensitive comments about the Chinese leader. The backlash comes one day after U.S Secretary of State Antony Blinken appeared to set the foundation for a return to warmer relations when he made the trip to China – the first visit by a secretary of state for five years.

Yesterday, the People’s Bank of China moved to ease benchmark borrowing rates in an attempt to stimulate lending to support the economic recovery. One 10 basis point cut is unlikely to get the economy firing on all cylinders but appears to be a sign of more to come. The Bank could also lower the current reserve ratio requirement, freeing up more capital within the system. The reserve ratio sets the minimum amount of commercial bank deposits that are required to be kept with the central bank as a buffer to meet increased withdrawals or external shock.

USD/CNH TECHNICAL ANALYSIS
USD/CNH has been a one-way market since early February despite mixed US dollar performance – which has rallied and sold off on the back of inflation sensitive news/data. With markets struggling to price in one, never mind two more hikes from the Fed, after officials foresee the Fed funds rate settling between 5.5% – 5.75%. Despite the slowdown in US rate expectations, actual rates in China have dropped, improving US-China interest rate differentials which supports the bullish trend.

After breaching the psychologically important 7.0000 mark, the pair tests 7.1965 with 7.2570 providing the next level of resistance.

— Written by Richard Snow for DailyFX.com

Worries over the debt ceiling have had the stock market on edge, yet the Saturday night deal to avoid a default may not trigger a big relief rally. That’s because aggressive Fed tightening and the end of the last Covid-era fiscal giveaways appear likely to help push the U.S. economy into recession later this year.

The rocket fuel of easy money and excessive government spending that propelled GDP, inflation and, for a long while, the stock market is nearly spent. A fiscal hangover is just beginning.

While the debt-ceiling deal reached by President Biden and House Speaker Kevin McCarthy includes pretty mild spending curbs, one detail could pack a punch. News reports indicate that the deal will codify into law the Biden administration’s planned end of the student loan payment freeze that has helped fuel spending over the past three years.

That will likely deepen a spending slowdown at a time that growth already has slowed almost to a stall. Yet the Federal Reserve, after five percentage points of rate hikes, may step even harder on the brakes. After last Friday’s hotter-than-expected PCE inflation report, Wall Street now thinks another rate hike is likely in June or July.

Meanwhile, any debt-ceiling relief for investors will be fleeting because the stock market is about to lose its own fiscal support.

The Treasury’s inability to issue debt in recent months has more than offset Fed efforts to tighten financial conditions by unloading assets purchased during the Covid-19 pandemic. But Treasury issuance is about to surge following a deal to raise the debt ceiling. That means we’re about to get Fed quantitative tightening on steroids.

Debt-Ceiling Deal
Facing a possible June 5 debt-ceiling breach, Biden and McCarthy reached a deal with much more modest spending curbs than House Republicans proposed. Instead of cutting discretionary spending back to 2022 levels, the cuts would hold nondefense spending at roughly 2023 levels, while exempting military and veterans’ health spending. For fiscal 2025, the discretionary budget allowance increase would be limited to 1%, below the rate of inflation.

The deal tightens work requirements for adults without children to receive food aid, while exempting the homeless and veterans. It also trims $10 billion from the extra $80 billion in IRS funding that Democrats passed to boost tax enforcement.

The White House has been resigned to at least modest discretionary spending cuts as part of a debt-ceiling deal. Even if President Biden had attempted an end run — such as by declaring that the debt limit is itself unconstitutional — he would have still needed the GOP-controlled House to sign off on the 2024 budget before the new fiscal year begins Oct. 1.

Failing that, the government might have shut down until the parties reached a spending deal. The last partial shutdown under former President Donald Trump eventually grounded air traffic while delaying paychecks for 800,000 federal workers, as well as contractors. A repeat scenario would surely amplify U.S. recession risks.

McCarthy may have had limited leverage, since any deal would need Democratic votes to pass. If he pushed too hard, Biden also may have resorted to a controversial plan to get around the debt ceiling.

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Student-Loan Payments
credit delinquency chartWhile the debt-ceiling deal averts the potential for harsh economic fallout that might have come from a breach, another fiscal time bomb is lurking.

Biden’s $400 billion student-loan forgiveness program faces a Supreme Court ruling in late June. If the justices find that GOP-run states have standing to sue, there’s a strong chance Biden won’t like the verdict. Recent rulings by the conservative-dominated court show little patience for government agencies adopting consequential policies without the explicit consent of Congress.

A ruling against Biden’s program to forgive up to $20,000 in federal college loans per person could hit borrowers by September. Biden has set an end-of-August deadline for lifting a three-and-a-half-year moratorium on student-loan payments.

The halt of student loan payments for about 40 million borrowers has cost the government more than $5 billion per month, including forgone interest, according to the Committee for a Responsible Federal Budget.

Yet that understates the extent to which the payment pause for $1.3 trillion in student loans with a median balance of $18,773 has helped consumer finances.

The average student loan payment was $393 per month for borrowers before the pandemic, Jefferies economist Thomas Simons notes.

“Consumer balance sheets are already kind of exhausted at this point,” Simons told IBD.

With the added pressure from an end to the student-loan holiday, “We’re setting up for a pretty significant rollover” for consumer spending in the second half of the year, he said.

Other Fiscal Drags To U.S. Economy
After dodging recession fears in 2022, the U.S. economy appeared to rev back up to start 2023. The Fed responded by turning even more hawkish. Now that burst of growth, which was helped by a mild winter and an 8.7% cost-of-living boost to Social Security benefits, is looking like the last gasp of pandemic-era fiscal fuel.

Two of the last remaining Covid-era supports for household finances have now hit their end date. Emergency SNAP (Supplemental Nutrition Assistance Program) benefits recently expired. That amounted to a hit of $95 per month for eligible households, or nearly $50 billion per year. Medicaid income limits, suspended at the start of the Covid pandemic, are now returning. That could knock up to 17 million people out of the program over the next year, leaving them to find more costly insurance coverage, a Kaiser Family Foundation analysis finds.

Covid-19 Pandemic-Era Giveaways
It’s hard to overstate how pandemic-era fiscal giveaways and ultralow interest rates transformed household finances. Three rounds of stimulus checks, unemployment benefits that were more generous than many paychecks, and expanded child tax credits helped Americans amass $2.3 trillion in excess savings by late summer 2021, a Federal Reserve study found.

An epic mortgage refinance boom cut average monthly payments by $220 for about 9 million families, the New York Fed says. Another 5 million capitalized on lower interest rates and higher home values to take $430 billion worth of cash-out refis.

Another New York Fed study estimates that student loan borrowers saw $195 billion worth of payments waived in the first two years of the moratorium, implying that sum has now grown to around $300 billion.

Fiscal Fuel For Inflation Spike
All of this helps explain why the U.S. economy has held up through 500 basis points of Fed rate hikes — twice the level of tightening that proved untenable in the last cycle. Yet it also explains why the economy has suddenly become much more vulnerable to recession.

That massive boost to savings — even as consumers splurged and paid down debt — mixed with pandemic supply-chain disruptions to set off an inflationary chain reaction. Because consumers had so much spending power, businesses held the pricing power to afford hefty wage hikes and still reap unusually wide profit margins.

Hiring remained strong because wage hikes helped to sustain robust demand. Plus, households gradually began to spend down their extra savings, piling up credit card debt amid high inflation and fast-rising interest rates.

Finally, to start 2023, the biggest inflation outbreak in four decades produced the biggest Social Security cost-of-living increase since 1981. At the same time, employers coughed up one more round of outsized pay hikes as the labor market remained tight.

U.S. Economy Sees Consumers Pull Back
credit card balances chartYet that cycle has now likely run its course. The consumer already pivoted in the fourth quarter of 2022. The urge to splurge drove the savings rate down to 3% of disposable income by September 2022 from close to 9% before the pandemic, boosting consumption by about $1 trillion at an annual rate. But caution then started to creep in, raising the savings rate to 4.1% of disposable income by April.

Even so, William Blair economist Richard de Chazal figures that consumers already have spent more than 75% of their excess savings haul during the pandemic.

Retail sales, after a COLA-flavored income bounce to start the year, have trended lower over the past three months, slipping about 1% in April vs. January’s level. Walmart (WMT) and Home Depot (HD), which both announced big minimum-wage hikes early in the year, have seen consumers take a step back. Walmart CFO John Rainey cited the end of emergency SNAP benefits and smaller tax refunds as contributing factors.

Businesses Change Spending Plans
Businesses have pivoted too. Corporations announced 337,000 planned layoffs in the first four months of 2023, according to the Challenger, Gray outplacement firm. That’s up more than 300% from the same period a year earlier. Labor Department data shows that the number of job openings sank by 1.6 million in Q1. That’s the biggest fall in data back to 2001, excluding the April 2020 hit during the Covid-19 pandemic lockdown.

The National Federation of Independent Business’ small business optimism index is at the lowest level in more than a decade. Nearly one-third of small firms say they’re dependent on bank credit at a time when short-maturity loans come with an average 8.5% interest rate, up 5 percentage points from March 2022.

As demand slackens and pricing power ebbs, high borrowing costs likely will push small businesses to cut their biggest expense: labor.

Businesses “are responding to a 500 (basis point) increase in interest rates over the past 14 months, which alone usually would be enough to push the economy into recession, but they now face a credit crunch too,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Shepherdson takes issue with Fed hawks eyeing further rate hikes because inflation isn’t coming down fast enough. Not only has the Fed done enough, he says, but a failure to cut rates very soon “will amount to overkill.”

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Can U.S. Economy Avoid A Hard Landing?
Treasury securities held by the Federal Reserve chartA case can still be made that the U.S. economy is headed for a soft landing. While pandemic-era government supports may be on their last legs, infrastructure spending and business investment are enjoying a growth spurt. Three big spending packages approved under President Biden could plow $1 trillion into earthmoving projects over a decade.

However, Jefferies’ Simons doubts that the ramp in spending on infrastructure, chip plants and green energy projects will come fast enough before consumption fades and layoffs pick up.

Yet others argue that consumer finances look plenty strong to keep the U.S. economy on track.

Despite hand-wringing over a rise in credit card debt, “Households are having no trouble servicing their debt,” wrote Doug Peta, chief U.S. investment strategist at BCA Research.

“We do not see any credit obstacles preventing households from sustaining their consumption growth” by taking on more debt, Peta said.

Yet the end of the student-loan moratorium could be a game-changer for consumers, while deepening problems for banks. Even without student-loan obligations, credit card and auto-loan delinquency rates have climbed back to pre-pandemic levels, New York Fed data shows.

Delinquencies are highest for younger borrowers, who are more likely to hold student loans in forbearance. Once those payments resume, delinquencies may spike.

Student-Loan Wildcard
The unknown fate of student-loan relief complicates the outlook for the U.S. economy and the stock market.

Even if the Supreme Court strikes down student-loan forgiveness, the White House has a backup plan. The Congressional Budget Office estimated that Biden’s Plan B, limiting repayment based on income, would cost the government $230 billion.

Under the plan, student loan borrowers would have to pay no more than 5% of income above about $33,000 per year, down from 10% under current law. That would surely minimize the economic hit once the moratorium ends. However, this relief plan also could get tangled in a legal fight if the Supreme Court rules against Biden’s loan forgiveness.

Stock Market Rally Faces ‘Liquidity Storm’
With hopes for a debt-ceiling deal and blockbuster earnings from artificial-intelligence play Nvidia (NVDA) lifting the stock market, the S&P 500 ended last week at its highest close since August.

Yet investors should be on guard for a stock market pullback, if history is a guide. The S&P 500 rallied a few weeks ahead of the 2011 debt-limit deadline. But the stock market turned down ahead of the deal, and the sell-off continued as the ink dried. The S&P 500 dived more than 10% in two weeks surrounding the Aug. 2 debt ceiling deal.

A replay of that stock market sell-off is far from certain, since debt-ceiling negotiators didn’t need a push from financial market stress to reach a compromise. The rally in artificial intelligence stocks also might have legs.

Still, investors have reason to worry that the immediate aftermath of a debt-ceiling deal might not be pretty, as the dam on Treasury issuance bursts.

For regional banks competing with high bond yields as they try to minimize deposit flight, the coming increase in Treasury issuance “is likely to make things worse,” Simons wrote. That risks a further tightening of lending standards.

Barry Knapp of Ironsides Macroeconomics told clients in an audio note that he sees the S&P 500 falling as low as 3,850 as the reprieve from Fed quantitative tightening abruptly ends.

“We’re on the verge of what we would describe as a liquidity storm,” he said.
From JED GRAHAM