Investors cheer US deal but worry about a permanent solution
The congressional battle’s effect on investors appears to be limited – for now
New York Stock Exchange: For Wall Street, the biggest concern coming out of the current battles is that they will force the US government to pay more to borrow money. photograph: brendan mcdermid/reuters
While investors were cheered on Wednesday by a last-minute agreement to raise the US borrowing limit and end the government shutdown, their relief was tempered by the knowledge that the deal was far from a permanent solution. And they were tabulating what the long-term costs of the political turmoil could be.
Under the agreement, the US government would be financed through to January 15th and the Treasury would have borrowing powers until February 7th. At that point, sharp political divisions could re-emerge and, with them, more volatility in the markets.
Many investors were left worrying that the budget crises that have become more frequent in recent years could spin on endlessly, with no long-term resolution. “I worry if this becomes a regular feature that all we can do is pass these three- or four-month fixes,” said Joe Kalish, the chief global macro strategist at Ned Davis Research. “If that’s going to be the case, it just puts this uncertainty into the market on a recurring basis.”
For one day, at least, investors breathed a little easier. The Standard & Poor’s 500-stock index ended the day just shy of the nominal record it hit in September (without adjustment for inflation), before the current impasse began. The short-term Treasury bills that were battered over the past two weeks were again popular as investors regained faith that the US government would not default on its obligations.
The congressional battles’ direct effect on investors appears to be somewhat limited. The markets never reached the same level of panic that preceded the previous debt ceiling crisis in 2011 and the so-called fiscal cliff in late 2012. At its low point during the past few weeks, the S&P 500 was down 4 per cent from its nominal high. On Wednesday, the benchmark index rose 1.4 per cent, or 23.48 points, to 1,721.54. During the US government shutdown, it actually rose 2.4 per cent.
The Dow Jones industrial average gained 1.4 per cent, or 205.82 points, to close at 15,373.83 on Wednesday, while the Nasdaq composite index climbed 1.2 per cent, or 45.42 points, to 3,839.43. There has been much more movement in the prices of short-term Treasury bills. Investors worried that the US government might delay some payments on its outstanding debt if the US Congress did not raise the debt ceiling before the Treasury exhausted its emergency borrowing measures.
For a one-month Treasury bill, the yield, which goes up as the debt becomes less popular, rose to a high of 0.35 per cent on Tuesday night after negotiations appeared to be falling apart, compared with 0.08 per cent a few weeks ago. On Wednesday, the yield fell in half, to 0.14 per cent. A six-month bill due on October 31st followed a similar pattern.
There is some concern that the enthusiasm on Wednesday could go too far, given that much of the damage in the markets in 2011 came after politicians voted to lift the debt ceiling. When Standard & Poor’s downgraded the US credit rating a few days later, stocks plunged.
One of the two other main credit rating agencies, Fitch Ratings, warned Tuesday that it had a negative outlook on its AAA rating for the United States. That did not seem to weigh on investors – and Fitch said its review would take months – but if Fitch ultimately lowered its rating, it could wreak further havoc on Wall Street.