are rallyingas the possibility of a short-term debt ceiling increase to allow for further negotiations between warring parties in Washington comes into view.
Société Générale global strategist Kit Juckes this will prove to be negative for risk assets, contrary to the market’s initial reaction to this news.
There are an awful lot of cross-currents in markets at the moment,” wrote Juckes in a note to clients this morning. “The U.S. political protagonists are talking again and Yellen’s nomination has been well received. Equities, credit and EM assets are all holding up reasonably well, despite upward pressure on U.S. yields amid reports of higher ‘haircuts’ on T-Bills as concerns grow about whether the debt ceiling can be increased before coupon payments are due. The result is that holding on to positions is harder.”
A short-term debt ceiling increase would likely extend the debate for another six weeks, bringing the potential for another crisis into view by Thanksgiving.
“The risk in the U.S. is that when a ‘deal’ gets done to raise the debt ceiling, it is a temporary debt ceiling increase that doesn’t resolve the underlying issues,” says Juckes. “If that happens, any hope of Q4 risk rally taking hold will be out of the window.”
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