After debt ceiling, oil next fuel for market

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Indian markets ended the week with flat returns. For the past few days, there were concerns around US debt ceiling drama. Now, the debt ceiling bill has been passed and that has given some relief to the market.

So let’s look at this whole issue. When government spends more than it earns it needs to borrow from the market. However, there is a limit on how much US government can borrow. That limit is known as the debt ceiling which is at $31.4 trillion. Now the bill has been passed to suspend that debt ceiling until 1st Jan 2025. This has bought relief to the market as that reduced uncertainty.

The market is forward-looking and there are just 2 things it focuses on. How much cash flows companies will earn in the future and what is the certainty of earning that amount? Any kind of political, health or climate issue increases the uncertainty of earning the predicted cash flows by the companies. So the market increase discount rate on cash flows and their value decreases.

This leads to a fall in the share market. If the debt ceiling bill wouldn’t have passed, various government employees wouldn’t have got salaries and a lot of government activities would have been disrupted. It would have caused huge havoc in the whole global economy. That scenario is dodged and uncertainty in cash flows due to that is over.

Now focus has shifted to the factors that will impact future cash flows themselves. That is the interest rate and inflation. In the near term, 2 major events will impact the market. 1st is Jobs data from US that and 2nd one is OPEC meeting. Non farm payrolls increased more than expected in the market. This is reported to be positive job growth for 29th consecutive month. Meanwhile, the unemployment rate has inched up to 3.7% from 3.4%.

This creates some confusion around intrest rates decision by US Fed in its 13th-14th June meeting. The economy is tight but there is a high probability that Fed won’t raise interest rates, this will boost the economy and the cash flows of companies won’t have a negative impact.

Similarly, there is an OPEC meeting where Saudi might go for an output cut but Russia might oppose it as oil money is fueling Russian economy and its war efforts. This might lead to confusion around oil prices which in turn can make them volatile or they might shoot up. Oil is used as input in various industries around the world. If oil prices increase then there would be cash outflows from the companies. Also, uncertainty in oil prices would reduce the probability of a high cash flow scenario.

In both cases, the present value of cash flows for various companies and even the whole market would reduce. Still, besides oil, there are loads of other factors but there were times when oil has single-handedly dominated the global markets and economy. Hence the market is carefully eyeing the OPEC meeting along with US Fed interest rate direction.