The US debt ceiling, not the shutdown, is the threat to investors

1st October 2013

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It is not the US shut down but the negotiations surrounding the debt ceiling that could have big implications for the investors say experts.

Investors have become used to political brinkmanship in the US with negotiations going to the wire but each time a resolution has been found. Hargreaves Lansdown’s senior investment manager Adrian Lowcock says: “These negotiations are the warm up act. The bigger issue, in around 17 days’ time, is negotiations to raise the $16.7trn US debt ceiling. Failure to raise the debt ceiling and allow the US government to continue borrowing could force the country into a default scenario which could then have more serious consequences for investors.

“A US default is highly unlikely but political negotiations could create volatility in stock markets.  This doesn’t look like a selling trigger. Investors should focus on their long term goals and use any short term weakness as opportunities to invest.”

HL notes that in August 2011, a similar scenario played out. The S&P 500 fell 19.74% from its peak in July 2011 as the S&P credit rating agency cut their top notch rating for the US and investors sold out. However by the end of the year the S&P had recovered and ended the year up 1.46%.

Chris Saint, Head of Currency Dealing, Hargreaves Lansdown says: “The US dollar extended its recent decline against the pound (lows of US$1.6261) after the deadline was missed. The fallout appears to have been limited by hopes that significant damage to the US economic recovery will be avoided, assuming a resolution can be agreed upon very soon.  In September we saw demand for US dollars rise 29% on the previous month.”

The chief investment officer of Psigma Tom Becket has lambasted the ‘fools who control the US economy in Washington” following the US government shut down.

In a note to investors, he describes US politicians as “useless, dangerous, clowns”. He adds: “This is our cutting edge view on the fools who control the US economy in Washington. Having quarrelled childishly over the US debt ceiling over the last few months, they have finally ‘gone over the edge’ and forced certain parts of the US public service to shutdown, as the money isn’t there to pay all the bills.

“For those of you worried that planes will be falling from the skies and murderers will be skipping merrily from jail, this is not the case. Instead, amongst other things, certain veterans/ pensioners will not get their entitlement cheques, lights will be turned off at landmarks, gates slammed shut at National Parks and, the lord be praised, Capitol Hill’s Twitter feed will shut down.

His assessment along with other experts is that the shut down will not have huge implications for the US economy at least  not yet.

“From an immediate point of view we are relatively unconcerned about the outcomes of this latest nonsense, as we expect a patchwork resolution to be thrown over this fine mess and we will move on to the next battle, over the details of the debt ceiling and the (yet to be passed) budget. Then we will have the US mid-term elections to look forward to. There will be some conciliation over the debt ceiling, although it might be a while before we get there.

“President Obama has been missing from negotiations and needs to step in to the breach, not least as his second term is following the same misguided path as his first. A similar event, admittedly in a less poisonous political backdrop, lasted 3 weeks in the mid-90s. Such a delay is unlikely here, although the Republican elephant would like to trample over Obamacare thoroughly to make himself heard,” he adds.

Becket adds: “The banking sector has recuperated and the housing market recovery is broadening out. Missing parts of the equation, such as small business confidence and capital expenditure were slowly coming back. Generally things are getting better, as we have suggested in our own (less worthy) missives in the last few months. The politicians should recognise that they are in danger of breaking this brittle recovery and delaying a return to trend growth again. Top of the list of companies’ concerns is Obamacare and taxation; boy do we love politicians.”

“In turn, in an environment where the economy is healing, where global growth is more balanced, where companies are very strong and interest rates very low, it will come as no surprise that the pesky politicians remain perched at the top of our list of concerns.”

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