Optimism and relief are likely to be the dominant emotions for investors on Monday, giving markets in Asia a lift as lawmakers in Washington reached a tentative agreement on the U.S. debt ceiling, thus removing the risk of a catastrophic default.
Trading and market liquidity in Asia will be lighter than usual, however, with U.S. and UK markets closed for holidays, opening up the potential for outsized market moves.
If so, they are likely to be outsized gains, certainly across risk assets – Wall Street rallied strongly on Friday, particularly the Nasdaq and mega tech stocks, and the news from Washington over the weekend will only be seen as positive.
After weeks of tough negotiations Republicans and Democrats reached a tentative agreement to suspend the $31.4 trillion debt ceiling, which now must get through the Republican-controlled House of Representatives and Democratic-led Senate before June 5 to avoid a crippling first-ever default.
Both sides are confident it will pass.
It could be a double-edged sword for Asian markets, if not on Monday than in the days and weeks ahead. A debt limit deal gives the Federal Reserve more room to tighten policy, which could push up U.S. bond yields and strengthen the dollar – not usually a good mix for emerging markets.
