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Equities recover as US House greenlights debt ceiling deal

By Charbel Kadib
4 minute read

The passing of legislation to suspend the US debt ceiling has helped restore investor confidence following a sustained dip in global equities.

The Republican-controlled House of Representatives has passed a bill to suspend the US government’s $31.4 trillion (AU$48 trillion) debt ceiling.

The bill will now be presented to the Democrat-held Senate, where it is expected to be greenlit and sent to US President Joe Biden for ratification.

The debt ceiling suspension will enable the government to avoid defaulting on its repayment obligations, with the US Treasury expected to exhaust its reserves by Monday (5 June).


President Biden welcomed the bill’s passage through the House (314-117), thanking Republican House leader Kevin McCarthy for his cooperation.

“Tonight, the House took a critical step forward to prevent a first-ever default and protect our country’s hard-earned and historic economic recovery,” he said.

“This budget agreement is a bipartisan compromise. Neither side got everything it wanted. That’s the responsibility of governing.

“…This agreement is good news for the American people and the American economy. It protects key priorities and accomplishments from the past two years, including historic investments that are creating good jobs across the country.”

Equities markets were buoyed by the news, with the ASX 200 regaining up to 0.7 per cent of its value after a poor start to trading.

Prior to the passing of the debt ceiling bill, the S&P/ASX 200 lost just under 2.2 per cent since trading opened on Monday (29 May).

Global equities have also been volatile, with the Dow Jones index slipping up to 10 per cent on Wednesday (31 May).

Volatility coincided with uncertainty over whether a deal would be struck to suspend the debt ceiling, as well as mounting expectations of further tightening from central banks.

In Australia, the latest consumer price index (CPI) reported annualised inflation of 6.8 per cent in April — well above market expectations of 6.4 per cent.

Stronger-than-expected job numbers in the US have also added to fears of further tightening from the Federal Reserve at its next meeting later this month.

According to AMP Capital chief economist Shane Oliver, global and Australian shares are “vulnerable” to “correction” over the coming months.

“For short term investors, it’s a time to be cautious,” he said.

But ultimately, investors with a longer-term position should “stick to basic investment principles”.

“Share market pullbacks are healthy and normal — their volatility is the price we pay for the higher returns they provide over the long term,” he continued.

“It’s very hard to time market moves so the key is to stick to an appropriate long-term investment strategy.”

Mr Oliver said selling shares after a fall “locks in a loss”, adding share market pullbacks provide opportunities to “invest cheaply”.

“Shares invariably bottom with maximum bearishness,” he said.

“…To avoid getting thrown off a good long-term strategy, it’s best to turn down the noise around all the negative news flow.”