Wall Street: What does ‘failing to lift the debt ceiling’ mean for the markets?

Wall Street: What does ‘failing to lift the debt ceiling’ mean for the markets?

The most recent CPI report revealed that US headline inflation unexpectedly decreased last month, confirming anticipation that the Federal Reserve may decide to stop raising interest rates in the coming month. Inflation may not have come down drastically but is not showing signs of a comeback either. Markets began on a positive note but ended the day almost flat.

“The increase in the US consumer prices index (CPI) has slowed down to below 5% in April and eased to 4.9%, which is the first time in two years. However, despite the recent slowdown, it still remains significantly above the Federal Reserve’s target of 2 per cent. In view of lower CPI, the US market surged and the major indexes of Wall Street began on a positive note,” Shrey Jain, founder and CEO of SAS Online, a deep discount broker.

The next key event in global markets will be the FOMC meeting to be held on June 13-14. Before that the US debt ceiling standoff needs to be resolved.

The other fear is about the US Debt ceiling showdown. “The White House and Republican leaders in Congress appear deadlocked on the debate over raising the debt ceiling. That is fueling fears that the country may default on its debt as it runs out of funds in early June,” says José Torres, Senior Economist at Interactive Brokers.

“Failing to lift the debt ceiling would result in the US defaulting on its debt, causing a decline in the country’s debt rating and making financing more expensive. It would also result in higher interest rates for both consumers and businesses while causing millions of job losses. A default, furthermore, would also lead to a lack of confidence in the US. On a positive note, Congressional leaders say they are hopeful that they can reach an agreement with the White House for increasing the debt limit,” adds Torres.

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According to Brian Levitt, global market strategist at Invesco, equities fell in the month leading up to the debt ceiling being lifted in 2011 and 2013, but then recovered. According to Levitt, the S&P 500 plummeted 17.2% and 4% one month ahead of the day in 2011 and 2013, respectively. In both years, the index climbed 28.1% and 21.4% in the next 12 months.

Investors are pricing in little movement over the next 30 days as the Volatility Index (VIX) is down 3.9% to 17 today and the S&P 500 Index is holding onto its impressive year-to-date gain of about 8%. “The shortest end of the yield curve appears worried about debt ceiling talks, but equity markets appear complacent. A continued stalemate in Washington due to a lack of compromise between Democrats and Republicans appears to be the largest threat to markets today. As the two parties appear more separate than ever on ideology and fiscal policies, the odds of a continued standoff are the highest since 2011,” says Torres.

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