Global indices are broadly trading higher this morning after Republicans moved to reassure investors by making clear that they are considering signing on to a short-term increase in the government’s borrowing authority to buy time for negotiations on broader policy measures. What is still unclear however is how much time these early negotiations will buy. Early estimates fall anywhere between a few weeks to a few months.
Whilst any agreement would hopefully stave off a possible default, we are still left in a situation where the Democrats are refusing to negotiate with Republicans – citing anger over the 2011 budget standoff where Obama felt “blackmailed” over the debt ceiling. Whilst Republicans are accusing Democrats of refusing to negotiate on matters they feel necessary. The last budget negotiations ended in the first downgrade of U.S debt.
Still, a political breakdown that leads to a debt default carries greater risk over the long run for Obama than for the Republicans. An economic crisis that might tip the country back into recession would tarnish his presidency and the durability of his initiatives such as expanding health care to millions of uninsured Americans and pushing through the most sweeping changes in financial-market rules in seven decades.
The benchmark Standard & Poor’s 500 stock index has dropped 4 percent since hitting a high on Sept. 18 amid concern about the political stalemate in Washington, though it’s still up more than 16 percent since the beginning of the year. During the 2011 debt talks, the S&P 500 stock index fell 16.8 percent between July 22, when negotiations on a broad budget deal collapsed, and Aug. 8, the first trading day after the government’s AAA debt was downgraded. The index didn’t recover to its July 22 level until February 2012.
The Bank of England are due to meet today with expectations that policymakers will leave monetary policy unchanged. Despite further signs of economic strength – with the IMF revising its economic growth forecast to 1.4 percent this year and 1.9 percent for 2014 – the central bank will most likely stick to its commitment to keep interest rates on hold while joblessness stays above the 7 percent target.
Unemployment currently stands at 7.7 percent, while consumer price inflation of 2.7 percent has exceeded the BoE’s 2 percent target since December 2009 and is not forecast to be back on target until late 2015. Early analysts estimates think a first rise in interest rates from their record-low 0.5 percent could come as soon as early 2015.
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