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Red-hot markets: Maximum tension over fears of a U.S. 'default'

Published 24/05/2023, 07:20 pm
Updated 24/05/2023, 07:20 pm
© Reuters

Investing.com - European markets are in the red this Wednesday - IBEX 35, CAC 40, DAX - following yesterday's declines on Wall Street and this morning in Asia. Investors remain very attentive to the current situation of negotiations between Republicans and Democrats in the United States over the debt ceiling.

Analysts at Link Securities, in their daily market report, said that stock markets have so far remained relatively calm in the face of the lack of an agreement to raise the debt ceiling limit, but uneasiness is already noticeable.

Renta 4 warned that positions remain opposed for the time being and Republicans are seeking an agreement that limits spending before accepting an increase in the debt ceiling. For her part, Janet Yellen, US Treasury Secretary, continues to assert that the Treasury could run out of cash on June 1, Renta 4 added.

Effect on the markets

Link Securities highlighted that given the prevailing uncertainty, investors take advantage of recent increases in some sectors/stocks, those that have been performing better this year, to make profits in case something happens.

Waiting for what happens today, the experts recalled that yesterday in Europe, the luxury sector was the most penalized, and on Wall Street, technology stocks and communication services, which had been leading market gains in recent weeks, suffered sales by investors.

'In extremis' agreement?

Analysts at Link Securities also said that Republicans and Democrats apparently remain far from an agreement, with negotiations stalled on issues such as the amount of spending cuts to be made and how to increase tax revenues. June 1 is the deadline for the U.S. to begin defaulting on its payment commitments, so it would be necessary for an agreement to be reached this week so that Congress can debate and approve the resulting legislation before the aforementioned "date X".

They further expect that as the days go by without agreement, the tension in the stock markets will increase. Even though the analysts remain convinced that neither party wants to appear guilty of the potential disaster that would result from a U.S. default, they note there will be an agreement, albeit limited and last-minute.

And if there is no deal?

Axel Botte, head of market strategy at Ostrum AM (a Natixis Investment Managers firm), also analyzed the US debt ceiling crisis in a note to clients.

Botte believes that the debt ceiling is an economic nonsense and has become a dangerous political weapon. He said if there is no agreement, some alternative solutions are the possibility of invoking the 14th amendment of the US Constitution, or even having the Treasury mint "one-trillion-dollar platinum coins," which would be placed in the Federal Reserve.

Winners and losers

However, given the improbability of these measures, Botte believes that an agreement must be reached. The analyst reviewed the potential consequences of non-payment and a possible downgrade in the US credit rating and, in light of the events of 2011, the previous debt ceiling crisis, established winners and losers.

At the social level, households, families, Social Security beneficiaries, and armed forces would be affected. At the investment level: the most affected would be all institutions holding US Treasury securities and also equities. Among potentially winning assets, gold and yen stand out, although cryptocurrencies could also have their chance.

Although default remains unthinkable, a credit rating downgrade could affect short-term US debt securities, weigh down equity markets and spur safe-haven assets such as gold and the Japanese yen, Axel Botte concluded.

(Translated from Spanish)

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