Optimism and a "relief rally" on Wall Street

Optimism on the market is visible to the naked eye. For two days we have had something like a "relief rally" because the risk of US default has been averted, and the words of American politicians have contributed to this. After several weeks of stagnation on Wall Street, another upward momentum has begun. Nasdaq xnumx it was the highest since April 2022. Good moods spread also in Europe. This is illustrated by the Dax index, which "attacked" historical peaks.

Progress in debt talks

Investors got what they wanted, that is reassuring words from Kevin McCarthy, who stressed in an interview that the negotiations are in a "much better place" and "an agreement can be reached". Added to this was the statement of Chuck Schumer - the leader of the majority in the Senate. He mentioned that talks on the debt ceiling are progressing and added that the Senate will take up the bill once it passes the House.

Wall Street is growing despite the fact that increased likelihood of interest rate hikes by the Fed at its June meeting. After the May decision and Powell's words, the consensus was that further tightening is realistic for me. Of course, we have not received an official announcement on this matter. However, some statements that suggested increases in the past have been removed.

Profitability is rising

Stocks are rising because investors are happy that the debt issue will soon be resolved. The dollar, in turn, gains a US bond yields are rising – because the June move up in interest rates becomes more real. This change in expectations is mainly due to the hawkish comments of Dallas Fed chairman Lorie Logan, who admitted that the arguments for a pause in hikes were not clear. She explicitly added that she would vote for a move of 25 bps if the macro data did not indicate that the economy is slowing down. And it just so happens that yesterday's labor market data were better than expected (lower number of unemployment claims and a strong rebound in the Philadelphia Fed regional index).

SP500 index was finally above the peaks of this year. Resistance at 4200 pts. was defeated, so from a technical point of view we received a signal of continued growth. The ratings are the highest since August 2022, although there is still a long way to go to the all-time highs. The ATH level was “attacked by the German Dax index and the breakout was from a rarely seen diamond pattern in the market. The coming days will be crucial. Unless we see strong profit-taking, then the gains should be maintained.

Source: Łukasz Zembik, OANDA TMS Brokers