Debt Ceiling

Guest Post: The 3 Rising Risks To The Markets

While the recent Federal Reserve inaction is bullish for stocks in the short term there are plenty of reasons to remain somewhat cautious.  Stocks are overvalued, rates are rising, earnings are deteriorating and despite signs of short term economic improvements the data trends remain within negative downtrends.   Investors, however, have disregarded fundamentals as irrelevant as long as the Federal Reserve remains committed to its accommodative policies.  The problem is that no one really knows how this will turn out and the current assumptions are based upon past performance. Complacency is not an option; it is critically important to understand that market reversions do not occur without a catalyst.  Whether it is the onset of an economic recession, a natural disaster or a financial crisis - there is always something that sparks the initial selloff that leads to a full blown market panic.  With this idea in mind here are 3 rising risks that investors should be paying attention to.

Forget The Debt Ceiling, The Dow Just Breached 15,000 (To The Downside)

The Dow is down for the 9th day of the last 11 since the exuberant Un-Taper spike in stocks. Crucially though, it appears the government's efforts to fear-monger equity markets into forcing action by the House Republicans is working. The all-important Dow 15,000 level has been breached to the downside and represents a much more important "economic" breach than the debt ceiling to any and every talking head it would seem...

President Obama To Explain The Bear Thesis To Equity Bulls - Live Webcast

He started the ball rolling on the "Do Panic" rhetoric yesterday, and it didn't work. Jack Lew stepped up this morning with some more fearmongery and we suspect during the President's address at 1040ET this morning he will point out the Armageddon that will occur should the debt ceiling be breached - and ask why aren't equity investors selling? It seems he needs to appoint that non-bubble-blowing Fed head asap...

Treasury Warns Default Impact Could Last A Generation

The President warned yesterday that "this time is different," and now the Treasury has weighed in with an even more ominous warning. In their statement, they note:

*TREASURY OFFICIAL: CONGRESS ACTION ONLY WAY TO AVOID DEFAULT
*TREASURY SEES `TENTATIVE' SIGNS IMPASSE AFFECTING MARKETS
*TREASURY SAYS BILL YIELDS MAY REFLECT `NASCENT CONCERNS'
*TREASURY: DEFAULT IMPACT COULD BE PROFOUND, LAST A GENERATION

And so it seems not only are they looking at the same indicators as the smart money in the markets but it is clear that the rhetoric will be increased until the equity market cracks and the politicians get their catalyst to act.

Someone Is Getting Nervous-er

It would appear that Warren Buffett's reassurance this morning that crossing the debt ceiling won't be so bad (trumpeted by any and all equity pitch men since) is being entirely ignored by the bond market. 1-month Treasury bill yields are soaring this morning - up 5bps at 12.5bps now (having touched 16bps - the highest yield in almost 3 years and notably higher than during the 2011 debt ceiling debacle). 1Y USA CDS are also up 3bps at 38.5bps this morning - notably inverted still. Of course, equity markets are surging back to open green for retail investors ignoring Obama's warning last night and Lew's "default has potential to be catastrophic" note this morning. In the meantime, the 1M1Y flattener trade we suggested goes from strength to strength as an indicator of market stress.

Are House Republicans Starting To Fold?

A growing number of House Republicans are voicing support for a clean CR and as Bloomberg reports with House Democrats, the 17 Republicans would have enough to votes to pass such a bill. As Politico notes, the fear appears to be that Congressional Republicans are in danger of morphing into the anti-Obamacare party rather than one devoted to fiscal conservatism and cutting out-of-control federal spending. The 'angle' appears to be, confirmed by Rep. Peter King (NY), Mario Diaz-Balart (FL), and Richard Hanna (NY), that “the CR is about spending. It’s the spending, stupid. We actually won 100 percent there," rather than obscure victory with an Obamacare focus. So far Boehner has shown no willingness to bring such a 'clean' bill to the floor.

On The Third Day Of Shutdown, Equity Futures Are Still Largely Unfazed Despite Obama's Warning

Despite the president's tongue-in-cheek warning to Wall Street that this time it's different, and it that "it should be concerned", that same Wall Street continues to roundly mock his attempts to talk it lower on the third day of America's "shutdown", knowing very well that if things ever turn bad, Mr. Chairman, aka the S&P chief risk officer, will get to work, and rescue everyone from that pesky thing known as losses. Whether the offsetting optimism was driven by made up China non-manufacturing PMI rising from 53.9 to 55.4, the highest in six months, or just as made up non-core European PMI data which also beat expectations despite Germany Services PMI continuing to telegraph a weakness, dropping from 54.4 to 53.7, is unknown and once again not important. So while futures are modestly lower if only until such time as the daily 3:58pm VIX slam takes place just before market close, do not expect any major moves in stocks until either the GOP finally folds and lets Obama have his way, or bundles all shutdown legislation into the debt ceiling negotiation, and careens the US right into the debt ceiling deadline on October 17 without any legislation in place.

House Republicans Plan To Link Debt-Limit And Shutdown Into One Fiscal Fight

Nancy Pelosi tried hard this evening (in the post WH meeting presser) to position the Democrats in order to disavow the inevitable but now Bloomberg is reporting that:

*HOUSE REPUBLICAN PLAN WOULD LINK SHUTDOWN, DEBT-LIMIT FIGHTS

House Republican leaders plan to bring up a measure to raise the U.S. debt-limit as soon as next week as part of a new attempt to force President Barack Obama to negotiate on the budget by merging the disputes over ending the government shutdown and raising the debt ceiling into one fiscal fight. This is not what most sell-side strategists expected as a base-case; in fact it is close to a worst-case for many - especially given Obama's apparent unwillingness to negotiate.

White House Meeting Ends In Failure: Boehner Says Obama "Reiterated He Will Not Negotiate"

Any hopes that tonight's meeting between the president and members of Congress, which lasted about an hour, would yield results just went up in smoke:

BOEHNER SAID OBAMA REITERATED HE WILL NOT NEGOTIATE
BOEHNER SAYS TIME FOR SENATE TO APPOINT NEGOTIATORS

Reid chimes in:

  • REID SAYS BOEHNER HAS TO ACCEPT `YES FOR AN ANSWER'

Which means the government shutdown will proceed into its third day, with little hope for a political resolution on the horizon.

Government Shutdown: Where Do We Go From Here?

In and of itself, the government shutdown appears to be a limited market event. The indirect effect, however, is on the other main risk scenario for markets – the deal on the debt ceiling (which will need to be in place before October 17). An increase in the probability of breaching the debt ceiling would likely be destabilizing for the market. For one, the effect on growth will be far larger – our economists estimate that it would imply an immediate cut in spending equal to 4.2% of GDP (4Q average of the fiscal deficit). Second, it would raise the risk of a US sovereign default because the Treasury does not believe it has the authority to prioritize interest payments above other obligations. As such, with markets firmly focused on US fiscal matters - so where to from here?

 

Bankers Warn Obama, Don't Mess With The Debt Ceiling (Again)

15 Bankers just paid a visit to the White House, listened to President Obama, and explained what a total disaster it would be if the US debt-ceiling is breached and Treasuries technically default. While the politicians exclaimed how bad a government shutdown would be, the banks have turned the panic dial to 11 as Goldman's Lloyd Blankfein noted, bankers are “in a position to really know early what the consequences are,” and it would be catastrophic. The irony that the firm which the government is trying to fine $20 billion for selling fraudulent debt and giving bad advice is now providing the same government with advice on its own bad debt, is not lost on us as Dimon was among the visitors but it is Blankfein's warning, echoing Obama, that will get the headlines, "they shouldn't use the threat of causing the U.S. to fail on its obligation to repay debt as a cudgel."

Jamie And Lloyd Visit Obama

Five years ago today, the CEOs of the big banks visited one US president with one goal in mind: get billions in taxpayer dollars to get bailed out. Today, the same bank CEOs are once again at the White House, this time invited by a different president, "as part of the Obama Administration's ongoing efforts to mend relations with the financial services sector and woo their support for White House policy." One can assume that in addition to the trite generalities surrounding the shut government and the debt ceiling, one topic of conversation is how Wall Street can accentuate the severity of the ongoing governance crisis and most certainly includes such demands by Obama as "stop sending stocks higher when the only catalyst is my inability to create any sort of compromise."

Stocks Jump (But Bonds Don't) As Obama Invites Congressional Leaders For Tea

It seems the non-negotiating red-line-making President is willing to umm... negotiate. Depsite Harry Reid's fire-and-brimstone, the WSJ reports that:

*OBAMA SAID TO INVITE CONGRESSIONAL LEADERS TO MEETING TODAY (at 530pm ET)
*OBAMA SEEKING FUNDING MEASURE FOR GOVERNMENT, DEBT CEILING HIKE

McConnell, Reid, and Pelosi are also to attend. Oh to be a fly on that wall? For now, equity algos are buying first and thinking later as bonds remain more stoic.