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Traders hopeful of setting loan limit; Strategists say this is an opportunity

WASHINGTON, DC – MAY 26: US Speaker of the House Rep. Kevin McCarthy (R-CA) speaks to members of the media after arriving at the US Capitol on May 26, 2023 in Washington, DC. Chairman McCarthy discussed the latest developments in the debt ceiling negotiations with the White House. (Photo by Vin McNamee/Getty Images)

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Analysts are broadly optimistic that a deal to raise the US debt ceiling will pass a divided Congress.

His comments come after US President Joe Biden and House Speaker Kevin McCarthy reached an agreement over the weekend to raise the debt ceiling to avoid government default for the first time.

Amid this turmoil, investors may be able to find a “market opportunity,” according to Stephen Pavlik, partner and head of policy at Renaissance Macro Research.

Negotiators have agreed on some Republican demands, such as stricter work requirements for low-income Americans.

The agreement also suspends the debt ceiling until January 1, 2025, which extends it past the 2024 presidential election. Excluding defense and veterans, spending will also be kept largely flat for 2024, while 2025 will see a 1% increase in spending.

Even if the two sides reached an agreement in principle, it would still require congressional approval by both the House of Representatives and the Senate.

“I think it’s virtually certain that it will be passed,” said Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania. He added that he had “little doubt that they were not going to reach an agreement … It’s going to be a deal and Wednesday voted positively.”

He called the suspension of the debt limit until 2025 a “good decision” and said he expected it to be delayed by only one year.

“I think they decided they wanted to go after the next election to raise that debt ceiling and not have another debate that could distract the American public from the core issues tearing the country apart.”

Republican or Democratic Victory?

Still, some Republican lawmakers criticized the deal after the announcement, while other hardliners threatened to sink the deal.

Pavlik predicted that McCarthy has the support of “a majority of Republicans” in the House, “but that majority could vary significantly.”

Speaking to “Squawk Box Asia” on Monday, Pavlik noted that about 75% of hardline Republicans would probably oppose the deal, pointing to the ultraconservative House Freedom Caucus, as well as hardline Democrats.

As such, with Republicans only holding a slim 222-213 majority in the House, Pavlik said he thinks McCarthy will have to rely on moderate Democrats to pass the bill.

“So it’s really going to take 75 more liberal votes on President Biden to make sure it’s enough to pass the House. I think if it does that, Senate passage can be assured.” could.”

For Pavlik, the deal was a “Republican victory”.

“The fact that there was a conversation is in itself a victory for Republicans,” he said, adding that Biden said earlier this year he would not negotiate about the debt ceiling but “was forced to “

He said the Democratic Party “could have gotten away with this when they had control of Congress two years ago at the end of last year. And they chose not to.”

US debt limit deal a 'democratic victory', says David Roche

David Roche, president and global strategist of the Independent Strategy, saw it as a “democratic victory”.

He expects the deal to pass the House with Democratic support, although, like Pavlik, he said right-wing Republicans will vote against it.

As the bill allows borrowing through 2024, the country will be able to put the issue behind it until it comes up again in 2025, Roche said.

Investment Opportunities

Pavlik said that the US Treasury will have to “replenish its coffers”., And if investors are looking at a scenario where the Federal Reserve is going to cut rates, “it could actually provide [a] Market opportunity,” he said.

Pavlik suggests that investors might consider buying Treasury bonds “to lock in some of the higher yields.”

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Separately, Siegel noted that US futures point to modest gains, adding that this is because a potential deal “removes a little bit of the uncertainty.”

However, the main concern for investors will be the “tremendous tightening” by the Federal Reserve, Siegel warned.

“Bank problems, which will not lead to a crisis of bank deposits, but will lead to a tightening of lending standards, especially to small and medium-sized companies. And I’m worried about the second half of the year and possibly Now the focus is on the problems we can see.”

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