Debt ceiling and banking concerns remain major stress points

Stock markets were recovering to a certain extent after economic data releases yesterday showed that inflation figures were moving along estimates. The figures supported the view that the Federal Reserve could maintain its interest rates at current levels which could help improve the appetite for risk among investors and support the stock market.

Overall the US stock market remained in relative limbo and traded horizontally for over a month with strong volatility at times. The market could continue to see various concerns impede its performance among them the debt ceiling issue as well as the banking sector concerns.

The discussion between the US president and Congress around the debt ceiling issue could increasingly become a pain point for the stock market as the potential date for a default approaches. A US default could have a tremendously negative impact on the global economy and on the financial system. In this regard, some banks have started putting in place contingency plans to face a potential default. As such, investors could be monitoring the developments around this issue every step of the way in the coming days.

In addition to that, concerns around the banking sector could continue to weigh on investors’ expectations. The ongoing surprises have eroded confidence in the sector and concerns about the effects of the higher interest rates on regional banks could linger for some time, but could be alleviated to a certain extent if interest rates effectively remain on hold and start to decline later.

Regional bank indices have been declining since the beginning of the bank confidence crisis and could remain at lower levels for some time as investors assess interest rates’ effects on smaller banks. Over the longer term, bank stocks could recover if the debt ceiling issue is resolved in time and interest rates start declining.

In the meantime, investors could decide to move towards safer assets and more liquid markets to diversify assets and alleviate risks if banking issues remain present and the discussions around the debt ceiling issue show no sign of success.