Forget Default, Is a Debt Ceiling Deal the True Risk for Stocks?
XM Group | May 23, 2023 09:24AM ET
Political theater
It’s almost certain that US lawmakers will ultimately reach a debt ceiling deal, even if it takes some time. Nobody really wants the US government to default as that would severely damage the nation’s credibility, raise borrowing costs and make matters worse for both parties. This showdown is a political game of chicken, and investors are fully aware.
Republicans want the government to slash spending, whereas the Democrats are only prepared to freeze public spending at current levels. Some compromise will eventually be found, hopefully before the X-date that Treasury Secretary Yellen has warned is around early June.
With the tech-heavy Nasdaq 100 index rising by nearly 27% so far this year and Bitcoin rallying 64% over the same timeframe, these instruments already seem overextended and susceptible to a deep correction. In contrast, the main beneficiary in the FX arena might be the US dollar, which tends to perform well when liquidity dries up and markets sell off.
In conclusion, investors seem to be focusing on the wrong risk. Even if the US government shuts down next month, the politicians will eventually strike a deal. What’s most important is what happens afterwards once the Treasury unleashes a tsunami of bond issuance, amplifying the effects of quantitative tightening.
It could be a tough summer for riskier investments, which have been flying high this year.
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