So, what is this USA Debt Ceiling and what impact will it have on Global Financial markets? The USA government spends more money than it earns and therefore it needs to borrow money to pay its bills. In an attempt to control the level of debt, it can only borrow up to a certain limit and that certain limit is called the Debt Ceiling.
The USA debt currently stands at around US$ 31 trillion and is on the verge of surpassing its debt ceiling of US$ 31.4 trillion. Once it reaches the debt ceiling it would no longer be able to borrow more money. Therefore, in order to not default on its existing interest payments, it would have to cut its spending and increase tax rates. This would have a cascading effect on the USA credit rating, interest rates, financial markets and all things bad.
But this isn’t the first time the USA is in this situation. Since 1960 it has been in such a similar situation 78 times and has come out fine all the time. How? Just by increasing its Debt Ceiling. The Debt Ceiling was last raised on August 1, 2021 to USD 31.4 trillion from USD 28.4 trillion. If the decision is to be made between two options – A Debt crisis and increasing the debt Ceiling – the latter would be selected all the time. Thus, debt ceiling is nothing but a must pass piece of legislation to save the country from the crisis. The USA has never defaulted on its debt obligation. The government has always been able to reach a deal with the congress to raise the debt ceiling.
Investors are therefore advised to not panic and make irrational decisions based upon the exaggerated media headlines. The debt ceiling is nothing like its name suggests. It is like the sky which keeps on going farther away as we build high rise buildings.
Nifty rose by 295.95 points, gaining 1.63% in this week. It has formed a strong candle on the weekly chart, closing above the previous week high of 18458.90. Nifty was consolidating between the 18050-18400 zones since last three weeks. It finally managed to break the 18400 resistance on Friday and closed at 18499.35.
On the daily chart, the 13 Day Exponential Moving Average (DEMA) continued to act as a strong support for Nifty. The support of 18200 seemed to be in trouble on Thursday this week before a sharp recovery in the last hour, pushed Nifty higher.
The Index has taken support from the 23.6% retracement level of 18,076 on 19th May, drawn from 20th March low of 16,828 to 15th May high of 18458, signaling that the correction from 18458 to 18060 from 16th to 19th May was on account of profit booking and not a change of trend.
However, the Relative Strength Index (RSI), a leading momentum indicator, is yet to break its previous high and traders are advised to be cautious as we step into the June series expiry.
The India VIX, also known as the fear index, fell by 3.27% during the week, from 12.30 to 11.90, gave major relief to the bulls.
Nifty is now just 2.10% away from its all-time high of 18887.60 made on 1st December, 2022. A follow up buying from here can take Nifty to 18700-18800 zones while the lower end support now shifts to 18300 from 18200 zones.