Quilter Cheviot|Weekly Comment

Stocks gain after US debt ceiling raised

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

US equities led global stock benchmarks higher last week, boosted by the news that an agreement had been reached to raise the federal debt limit, averting a US default. The MSCI All Country World index rose 1.6% last week, closing out May with a decline of 1.0% but still up almost 11% for 2023.

The bill to raise the debt limit passed votes in the House of Representatives and the Senate comfortably, and an amicable solution is a welcome development for investors. The monthly US jobs report also provided some cheer for stocks, with a solid – but not too hot – report attracting buyers into the weekend. 339k jobs were added in May, substantially above the 190k consensus forecast, but a surprising rise in the unemployment rate to 3.7% suggests that employment may be cooling – a pleasing development for those concerned about rising price pressures due to a hot labour market.

US large-cap benchmarks gained just under 2% on the week, moving up to their highest levels since last summer. Technology indices continued to outperform, adding 2.1% to notch up a 6th consecutive weekly advance and hitting their highest levels in over a year. There were notable declines in short-term US Treasury bills due to the raising of the debt ceiling. The US dollar softened a little against the pound, suggesting that even though the debt ceiling was a US problem, the greenback retains a safe-haven status in times of uncertainty. The pound ended the week at 1.25 against the US dollar, up from 1.23.

UK stocks ended the week little changed, rounding out a challenging May with a monthly decline of 5%. One reason behind the recent UK underperformance has been signs that the Chinese economy is not rebounding as quickly as some had hoped following the easing of Covid-19 restrictions. This has weighed on mining stocks and oil majors that comprise a sizable weighting of UK benchmarks.

More OPEC+ cuts

Saudi Arabia has announced it will take more of its oil production offline in a bid to support falling prices, following an OPEC+ meeting of producers over the weekend in Vienna. The Kingdom is often seen as the de facto leader of the cartel and as it is in the position of being one of the highest volume and lowest cost producers, it has significant flexibility to change production in an attempt to impact the market price.

Previous cuts announced in April provided a short-term rally in the oil price but in recent weeks there has been more selling as global economic activity has slowed. The latest move will see Saudi Arabia cut its output to 9m barrels per day in July, down from approximately 10.5m barrels per day in April. Maximum output for the country is estimated to be in the region of 12m barrels per day. The broader OPEC+ group, which includes Russia and accounts for more than half of global production, will target 40.5m barrels per day in 2024, extending voluntary cuts made in April.  

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