Global equity markets ended the week higher after the US President Joe Biden and the Speaker of the House of Representatives Kevin McCarthy said they were making progress in their debt-ceiling negotiations in order to avoid a US default.
While we believe that a default is unlikely, we should highlight that the brinkmanship playing out in Washington as we near the debt-ceiling deadline means any misstep could result in a deeper and longer US recession than we are currently expecting – and unfortunately, this means that equity markets are likely to remain on edge in the short-term.
And while an eleventh-hour agreement is likely, it doesn’t mean the US economy won’t be negatively impacted. For example, following any deal we are likely to see a sharp increase in US government bond issuance to help replenish the Treasury’s coffers, which could further tighten liquidity in the fragile US banking sector. This in turn could result in banks tightening their lending requirements, and less lending will, at the very least, slow the economy.