US debt ceiling deal is no cause for cheer

US legislators voted last week to suspend the $31.4 trillion debt ceiling, but some observers are cautioning that it’s little cause for investor celebration.

“The rally needs more,” UBS said last week. The debt ceiling deal may only add to US growth headwinds, with the American economy now facing greater fiscal restraints as well as the Federal Reserve’s tighter monetary policy. Morgan Stanley also has concerns, pointing out that S&P’s historic downgrade of US debt in 2011 came after the resolution of a “similarly wrenching” debt ceiling debate. Rating agency Fitch has already put the US AAA rating on negative watch, it adds.

UBS economist Paul Donovan, who has been railing against the debt ceiling “farce” in recent weeks, is more blunt. “This is not a ‘successful’ conclusion to the nonsense,” he said last week. Not abolishing the debt ceiling means the issue will come up again, wasting politicians’ time, economists’ time, and adding “unnecessary risk and uncertainty” to a slowing economy.

In a separate note last month, Donovan said the debt ceiling farce “has had more reruns than the TV show Friends”. He’s right – and investors can expect another rerun in two years’ time.