(Bloomberg) – Investors are bracing for spikes in currency volatility and stock losses as the United States struggles to reach a debt limitation agreement.
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The dollar was trading in tight ranges against its major counterparts at 6 a.m. in Sydney as market participants assessed the latest developments. House Speaker Kevin McCarthy said he and Speaker Joe Biden would meet on Monday afternoon and negotiators would resume debt talks later on Sunday. The Republican leader said he and Biden, who is returning from the G-7 summit in Japan, had a “productive” call. “Time is running out,” McCarthy added. Treasury Secretary Janet Yellen said on NBC’s Meet the Press that the United States is unlikely to reach mid-June and still be able to pay its bills.
The debt ceiling debate has become an unwelcome prop for investors already dealing with uncertainty surrounding the Federal Reserve’s next policy move in June. Strategists at JPMorgan Chase & Co. and Morgan Stanley warned that a stalemate threatens the stock market outlook, while traders also piled into swaps and options on major currencies to hedge their portfolios. European Central Bank President Christine Lagarde called on U.S. politicians to resolve the impasse in a television interview broadcast on Sunday.
“Despite encouraging headlines, history suggests lawmakers will take things seriously, which will add to market volatility,” said Carol Kong, strategist at Commonwealth Bank of Australia in Sydney. “If, and once, a deal is struck, attention will quickly turn to economic data and the FOMC, which I believe will lead to further modest dollar gains.”
The back and forth between lawmakers has Wall Street bracing for the worst, with commercial banking, corporate and consumer leaders from the nation’s three largest lenders trying to predict how the government’s non-payment of bills would ripple. on the stairs. Some remember 2011, when a similar episode led to massive price swings across all asset classes.
Yet investors may be underprepared. Some 71% of respondents to a recent Bank of America survey expect resolution before the so-called X date, when the government exhausts options to finance itself, but not necessarily go into default.
The S&P 500 index rose last week on hopes that a resolution is near. An indicator of dollar strength hit a two-month high, boosted by demand for safe haven and stronger expectations for Fed hikes.
Yen, Stock bets
In addition to US assets, the yen, commodity-linked currencies and emerging market equities that are sensitive to swings in risk sentiment are also under scrutiny. The yen was little changed against the dollar at the start of Asian trading, while commodity-related currencies were listed mixed against the greenback.
Goldman Sachs Group Inc. says the impending U.S. debt ceiling is a “plausible catalyst” for hits to economic growth and stock markets.
“The emerging markets model is quite simple: large export markets, such as Korea, Mexico and Taiwan, tend to underperform the most,” strategists including Caesar Maasry wrote in a note.
–With the assistance of Michael G. Wilson.
(Updates with the start of currency trading in the second paragraph.)
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