Market snapshot: debt ceiling progress noted but no celebrations yet

While there's been progress on the US debt ceiling, there are further hurdles before investors can celebrate. Our head of markets explains what's moving share prices at the start of this four-day week.

US markets have not yet had a chance to react to the news that an agreement in principle to the debt ceiling conundrum was reached over the weekend, having been closed on Monday.

While the initial reaction is likely to be positive, sentiment will be tempered by the fact that the deal is not yet over the line, with the next hurdle being Congress where there have already been some rumbles of dissatisfaction. In any event, further developments will be keenly awaited this week as the political saga continues to unfold, and until a definitive agreement is reached, markets are likely to resume something of a holding pattern.

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The main indices closed the week higher, with the Nasdaq adding to its recent strength as chipmaker shares gained once more on reports from Marvell Technology Inc (NASDAQ:MRVL) that its revenue relating to Artificial Intelligence would double this year. Another strong session left the Nasdaq up by 24% in the year to date, with the technology-influenced benchmark S&P500 ahead by 9.5%, and with the more traditional Dow Jones marginally down by 0.2%.

If a debt ceiling agreement were to be reached this week, investors will return to business as usual, with the non-farm payrolls report due on Friday. The expectation is for 180,000 jobs to have been added in May, as compared to the previous month’s reading of 253,000.

The release will be one of the last pieces of data input for the Federal Reserve before the upcoming June rate setting meeting, where the consensus remains split between a pause and a further hike of 0.25%, given the ongoing strength of recent economic numbers. On Friday, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures index came in higher than expected, further muddying the waters.

Asian markets were mixed overnight, with the debt ceiling agreement not yet fully confirmed. Local markets resumed their current narrative, with some weakness in China over the perceived lack of strength in the economy following the reopening, while the Nikkei continued to trend higher, partly helped by expected US dollar strength equalling yen weakness and giving a further boost to Japanese exports.

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The FTSE100 dropped slightly at the open, also having been closed on Monday, with any debt ceiling progress having been noted but with any celebrations on hold until a done deal is announced.

Some weakness in financial stocks dragged on the index, with some tentative buying of defensive stocks insufficient to stem the small decline. Even so, the index remains ahead by 2.1% in the year to date, with further direction likely to be taken from the Wall Street open later in the day.

The latest reshuffle of the premier index will be announced after the close of play on Wednesday, based on closing prices from today.

While last week’s FTSE Russell release suggested that Ocado Group (LSE:OCDO) would be in the firing line for relegation, the shares have subsequently staged a mini-rally largely allied to the strong Marks & Spencer Group (LSE:MKS) numbers last week, which include the M&S/Ocado joint venture.

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As such, the current indications are that British Land Co (LSE:BLND) and Frasers Group (LSE:FRAS) are likely to face relegation following dips of 20% and 16% respectively over the last three months. These are likely to be replaced by IMI (LSE:IMI) and Hikma Pharmaceuticals (LSE:HIK).

IMI is well-known to seasoned investors, previously having been a FTSE100 stalwart in its days as Imperial Metal Industries and having been previously relegated in December 2014. Hikma, meanwhile, has had a recent chequered past which has seen the company in and out of the premier index on more than one occasion.