The looming US debt ceiling debacle

Remember when the S&P cut the credit rating for the US, the world’s most reliable borrower, sending violent waves of unease throughout global markets? 

In 2011, political deadlock in the senate led to a government shutdown because an agreement couldn’t be reached on whether to raise the debt ceiling. Congress was locked in a bitter dispute over budgetary control and the spending plan under Obama’s administration. 

At the time, some members of Congress were even suggesting that the US should default on its obligations, something that has never happened before. The dispute and the fear of a government shutdown led to a sharp sell-off in equities and ultimately the downgrade of US debt by S&P.

Fast forward to October 2015 and the same budgetary wrangling forced Obama and Boehner to create a debt ceiling holiday. That holiday is due to end 15th March 2017.

Republican Majority 

One would think having a Republican-dominated Congress, a new deal on the debt ceiling would be quickly ushered through. 

This assumption may be misconceived as many Republicans have vehemently opposed increasing the debt ceiling and voiced their wish to reduce the deficit, not expand it as Trump proposes. 

So while markets have rallied on yet-to-be-delivered promises of infrastructure spending and tax cuts, the US has been hurtling towards a possible government shutdown and a halt to spending on major services. 

There is also the possibility of a US default if a deal is not struck by the end of the year. 

Potential Volatility

As we get closer to 15th March without a deal it is likely markets will really start to question when, if ever, Trump will unleash his fiscal stimulus and tax reforms.

The prospect of undelivered promises from Trump could well cause the type of nervousness in markets that unleashes high levels of volatility.  

With equity valuations at multi-year highs, in this scenario one may consider looking for the exit before the stampede of the ‘Trump Trade’ unwind.