Brace for more market jitters after debt ceiling deal, Morgan Stanley warns

Biden and Kevin McCarthy

US President Joe Biden and Speaker of the House Kevin McCarthy.Drew Angerer/Getty Images

  • The debt ceiling agreement could increase uncertainty in stock markets, according to Morgan Stanley.

  • Joe Biden and Kevin McCarthy agreed to suspend the US borrowing limit on Saturday night.

  • The S&P 500 plunged 12% in three weeks as the government narrowly avoided default in 2011.

Investors should brace for heightened uncertainty following the eleventh-hour debt ceiling compromise, according to Morgan Stanley.

The bank said on Sunday that while news of a tentative agreement to suspend the borrowing limit “should bring a sigh of relief”, it could inject more volatility into the markets.

“It is important to think about the risks that will follow once the debt ceiling impasse is resolved,” Morgan Stanley head of quantitative research Vishwanath Tirupattur said in a note to clients.

“The relative calm in the markets seems puzzling to us,” he added, referring to “fear gauges” in stock, bond and credit markets indicating levels of volatility far below those of the banking crisis. March regional.

President Joe Biden and House Speaker Kevin McCarthy said Saturday night they had reached an agreement to suspend the debt ceiling until January 2025 while limiting spending in the 2024 and 2025 budgets.

If it passes through Congress, it will prevent a potentially catastrophic default – with Treasury Secretary Janet Yellen warning last week that the government could otherwise run out of money as early as June 5.

The last time the United States came this close to its so-called “X date” was in 2011, when the benchmark S&P 500 stock index plunged 12% in the three weeks after the lawmakers voted to raise the debt ceiling.

Morgan Stanley does not expect this level of market chaos again – but Tirupattur flagged several looming issues that could rattle stock prices even after the potential crisis in Washington resolves.

In 2011, ratings agency S&P downgraded the sovereign debt rating of the United States after an agreement to raise the debt ceiling was voted on – and Fitch Ratings also placed the triple A rating of United States under surveillance last week.

Rating downgrades weigh on the creditworthiness of a debt issuer – in this case, the United States – and could drive up future borrowing costs.

This, in turn, could weigh on equity prices because, as borrowing becomes more expensive, government spending levels are expected to decline.

Morgan Stanley’s Tirupattur said the Treasury would likely issue a flurry of bills in a bid to raise more cash once a debt ceiling deal is passed by Congress.

Investors buying these short-dated bonds could “deplete liquidity in the system” for stocks and other assets, Tirupattur wrote.

Learn more: Wall Street braces for market chaos as debt ceiling showdown drags on

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