Fixing the US debt ceiling means lower liquidity?

The deterioration in liquidity could be a paradoxical outcome if the US debt ceiling is resolved – a factor that could put pressure on US equities, strategist Sahil Mahtani and Ninety One analyst Daniel Morgan said in a note.

They consider four scenarios for the ongoing US debt ceiling impasse.

The first, and in their view, the most likely is a negotiated deal, possibly involving some cost cuts and regulatory changes.

The second is to raise the debt ceiling without congressional approval. The third is an interest-priority no-deal scenario, and the last option is a no-deal scenario with complete default, although the likelihood of this, they believe, is remote.

Overall, they see a deal as the most likely scenario, but what does that mean for the markets?

According to Mahtani and Morgan, this will mean a reassessment of the macroeconomic outlook in the US, as the risk of worsening growth will be avoided, leading to a slight increase in the interest rate curve in this country.

“It will also lead to the reversal of some market anomalies, such as the normalization of the short-term curve of US Treasuries.”

However, despite some immediate relief in the markets, reaching a deal could put pressure on US stocks going forward.

“The liquidity outlook will paradoxically worsen as the US Treasury begins to rebalance its cash balance and liquidity drains from the US economy.”

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(Lucy Raitano)


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