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US debt ceiling raised

US debt ceiling raised

The US debt ceiling has been raised until February 7th, with the government fully funded until January. The can has been truly ‘kicked down the road’. The market will now focus on the damage done and the potential for the Fed to taper in the coming months (before the US Government shut down you may remember ‘Tapering’ was set to be the economic event of the year).

Yesterday afternoon, as the news of an agreement was released, USD began its relief rally, driving down cable to 1.5870. However as Europe closed USD began to weaken and has continued to do so this morning.

Here are a few of our initial thoughts on the debt deal and its impact on the markets:

  • 144 Republicans voted against the bill to raise the debt ceiling a few hours before the US would have been in default territory. This does not bode well for future negotiations.

  • The budget needs to be agreed by Dec 13th or the government will shut down again

  • Even if the latest fiscal stand-off has caused lasting damage to the US’s reputation, it will take years, if not decades, to play out, and in the interim Treasuries will still remain an attractive asset class because it remains the most liquid asset in the world and there really is no alternative to it in the capital markets.

  • The focus is now on economic data and the timing of Fed tapering. Is the US growth story still fine after the fiscal stalemate in Washington? Estimates suggest that the government shut down could knock 0.6% from Q4 growth in the US, which could take time to claw back. This could delay tapering to March 2014, or even longer…

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