New York
Act Daily News
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The market is bracing for an ideal storm of dangerous news. The newest fear? The impending debt ceiling drama in Washington.
The United States hit its borrowing cap on Thursday, forcing the Treasury Department to begin taking “extraordinary measures” to maintain the federal government open.
If an settlement isn’t reached, markets may plunge (like they did the final time this occurred in 2011) and the United States dangers having its credit standing downgraded once more.
“From both an economic and a financial perspective, a failure to raise the debt ceiling would be an unmitigated disaster,” mentioned David Kelly, chief international strategist with JPMorgan Funds, in a report earlier this week.
Kelly added that “a failure to increase the debt ceiling is the most immediate fiscal threat to the economy and markets in 2023” and {that a} deal is required sooner quite than later in an effort to reassure the markets.
“Financial chaos would, presumably, eventually lead to some compromise in Washington. However, this might not occur soon enough to prevent a recession and could leave some lasting scars, including a permanent increase in the cost of funding U.S. federal debt,” Kelly mentioned.
That can be catastrophic news for the financial system. And buyers are not shrugging off damaging headlines.
There’s a saying on Wall Street that dangerous news for the financial system is definitely good news for the inventory market and vice versa. That’s as a result of buyers usually guess that dismal headlines will ultimately immediate the Federal Reserve and different central banks to chop rates of interest and supply extra stimulus that may assist increase company income…and inventory costs.
But Wednesday’s large market sell-off and the continued slide Thursday would possibly characterize a turning level for market sentiment. The Dow was down about 250 factors, or 0.7%, in late morning buying and selling, and it has now given up its good points for the yr. The S&P 500 fell 0.9% whereas the Nasdaq slid by greater than 1%.
After a promising begin to the yr, shares have seemingly taken a flip for the more serious. Bad news truly is likely to be dangerous news.
“We’ve been snuggled up in expectations of a soft landing for the US economy,” mentioned Kit Juckes, chief international overseas alternate strategist at Societe Generale, in a report Thursday. “Take away the blanket and it feels chilly.”
Yes, the Fed is now more likely to increase charges by “only” 1 / 4 of a proportion level when its two-day assembly wraps up on February 1 as inflation pressures abate.
Still, the promise of smaller price hikes and the potential for a Fed pause later this yr is not sufficient to counteract the rising proof that the US financial system could also be in for a tough patch.
Retail gross sales fell greater than anticipated in December. Industrial manufacturing unexpectedly slid final month too, an indication of weak spot within the manufacturing sector.
“A clutch of economic data releases…indicate that the economy is finally slowing more broadly, and that the all-important consumer is becoming increasingly careful about spending,” mentioned Quincy Krosby, chief international strategist for LPL Financial, in a report.
“What just some weeks ago would have seen markets cheering the weaker data…is now being judged more harshly with bad news no longer enjoying a warm welcome,” she added.
Earnings from large banks have been combined. Surging mortgage charges have already dented demand for housing. And a number of financial institution CEOs have warned that a recession might lie forward.
Market strategists at Evercore ISI declared in a report Wednesday that “the market’s New Year rally has concluded,” and that current knowledge reinforces a base case of a recession starting within the second half of this yr.