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The debt ceiling crisis could help stock markets experience another bout of volatility, financials firm BlackRock warns.
This is because the pressure from the debt ceiling is colliding with the existing financial stress from interest rate hikes.
“The sell-off could lead risk assets to better price the economic damage we expect from rate hikes.”
The dispute over the US debt ceiling and financial difficulties stemming from rising interest rates will send the stock market through another wave of volatility and a potential sell-off, the financial firm warned BlackRock.
In a note On Monday, strategists pointed to growing signs of turmoil in financial markets as the deadline for raising the US borrowing limit approaches.
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Bond markets are already more volatile than they were in 2011, when the US last risked a default. Back then, the S&P 500 fell about 17 percent between July and August 2011.
That means the current debt-ceiling crisis could trigger similar volatility in markets, strategists warn – adding to existing financial stress from higher interest rates in the economy.
Stock market sell-off?
“The dispute over the debt ceiling will add to the volatility in the financial markets that characterizes the new regime. Any sell-off could result in risk assets better pricing in the economic damage we expect from rate hikes,” the note continued.
BlackRock isn’t with everyone, however Shares pessimistic. Instead, emerging market equities are overweight, which benefited in the short term from China’s economic restart, the approaching end of central bank tightening and a weaker US dollar.
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In contrast, according to BlackRock, developed market equities are underweight. This is justified by the financial and economic damage caused by interest rate hikes and by corporate earnings forecasts, which do not fully reflect a recession.
BlackRock forecast for months a new kind of volatility in financial markets due to the Fed’s aggressive rate hikes in 2022. The Fed has hiked interest rates by more than 1,700 percent over the past year to keep inflation under control, a move that has increased the risk of a recession and rendered legacy investment strategies obsolete, strategists warned.
Adding to these risks is the threat of a US default, as Congress may have less than a month to determine the national borrowing limit raise before the government spent the moneyhey This scenario could easily be one Economic crisis trigger, experts warn, as USDebts play a major role in the global financial markets.
Policymakers are still bickering over raising the debt ceiling, and President Biden and senior congressmen are expected to meet this week to discuss a possible solution.
Republicans have one short-term increase in the debt limit by $1.5 trillion in exchange for some $4.5 trillion in government spending cuts, while the White House rejected any conditions for an increase has.
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