US Debt Ceiling Crisis: Will it Crush US Stocks and the Dollar? Gold Emerges as the Ultimate Winner!

BlackRock warns that the US debt ceiling crisis could exacerbate financial pressure caused by rising interest rates, leading to another round of market volatility and potential sell-offs. The current bond market volatility has surpassed that of the previous US debt default risk, which saw the S&P 500 index decline by around 17% between July and August 2011. BlackRock cautions that the current debt ceiling crisis could trigger similar market turbulence. The company suggests increasing exposure to emerging market stocks, which could benefit in the short term from China's economic restart, nearing the end of central banks' tightening policies, and a weakening US dollar; and advises reducing holdings in developed market stocks.

According to the latest MLIV Pulse survey, the majority of respondents, when asked what asset they would purchase as a hedge against the risk of the government breaching the debt ceiling and failing to fulfill its obligations, chose gold. Among them, European investors showed a greater inclination towards gold compared to US/Canadian investors. The likelihood of US/Canadian investors choosing US bonds (18%) was nearly double that of European investors. Regarding the potential impact of the debt crisis on US bonds, the respondents' opinions were divided, with 46% expecting an increase in bond prices and 54% expecting a decrease. Overall, nearly 70% of respondents believed that the US dollar would decline within a month.

Spot gold prices rose on Monday, benefiting from a weakening US dollar, while investors remained cautious about the ongoing stalemate in US debt ceiling negotiations. This could deepen concerns about global economic slowdown, making gold a more attractive option for investors holding non-US dollar currencies. Han Tan, Chief Market Analyst at Exinity, stated, “Worries over US debt ceiling negotiations persist, along with expectations of the Federal Reserve ending its tightening cycle, supporting gold above $2,000.” Data released last Friday showed that US consumer confidence fell to a six-month low in May, as concerns grew about the political showdown over raising the federal government's borrowing limit potentially triggering an economic downturn.

However, ING International believes that if US lawmakers fail to make significant progress in breaking the debt ceiling deadlock, the US dollar may appreciate. US President Biden is expected to hold further discussions with congressional leaders on Tuesday regarding plans to raise the debt ceiling. Analyst Francesco Pesole at ING International stated in a report that unless there is positive news in this regard, they believe the current risk balance for the US dollar still leans towards the upside, with safe-haven funds likely flowing into the US dollar as market risk sentiment remains subdued. Francesco Pesole mentioned that the US dollar index (DXY) could potentially rise to 103.50-104.00 in the coming days.