Kevin McCarthy’s unprecedented ouster from the US House of Representatives position last week has understandably triggered a wave of pain for investors and market analysts who have witnessed further evidence of the dysfunction in US politics. Ta.
After all, the move was the result of a forced vote by a small number of far-right members of Mr. McCarthy’s own Republican Party after he had managed to avoid a government shutdown the previous weekend. In the eyes of the rebels, his deadly sin was collaborating with the Democratic Party to get a deal. Meanwhile, House Democrats had no intention of offering Mr. McCarthy a lifeline.
Investors insisted that political turmoil was not to blame for the bond selloff that pushed long-term Treasury yields to 16-year highs and stock prices to their lowest since early June, but that it was a sign of unsettling long-term conditions. It is considered to be part of. driving pattern.
“While we do not expect this particular event to destabilize markets, the dysfunction in Washington may further strengthen confidence in American exceptionalism,” Karl Ludwigson, managing director at Bel Air Investment Advisors, said in a note. There is a possibility of failure.”
The yield on the 30-year US Treasury note BX:TMUBMUSD30Y rose 23.2 basis points last week to end Friday at 4.941%, its highest level since September 20, 2007. The yield on the 10-year US Treasury bond BX:TMUBMUSD10Y exceeded 4.80% as of October 1st. On the 3rd, it was the highest level since August 8, 2007, ending the week at 4.783%.
Market participants on Friday focused on the U.S. September jobs report, which was much better than expected. The stock price initially fell, but regained its footing and closed on a solid note. Following this rebound, the S&P 500 Index SPX turned positive for the week, rising 0.5%, ending a four-week losing streak, while the Dow Jones Industrial Average DJIA ended its weekly decline by 0.3%. The NASDAQ Composite Index rose 1.6%.
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Undoubtedly, investors will be primarily focused on inflation statistics over the coming week as they try to assess the likely path of the Federal Reserve’s interest rates. The September Consumer Price Index will be released on Thursday, the day after investors capture wholesale price pressures through the September Producer Price Index.
But more political drama is expected over the coming week as divided House Republicans try to choose Mr. McCarthy’s successor. Given Mr. McCarthy’s fate, it seems unlikely that his successor will ever make it across the aisle. Oddsmakers now see an increased risk of a government shutdown when stopgap funding measures expire next month.
Mr. Ludwigson said Mr. McCarthy’s ouster, with no clear successor and a potential government shutdown looming, comes amid heightened market volatility, particularly in interest rates. It said it was contributing to increased uncertainty around the process of maintaining a functioning government.
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It all came after the U.S. narrowly avoided defaulting on its debt for the first time in history during a showdown over the debt ceiling in Congress earlier this year. In response to the dispute, Fitch Ratings in August downgraded the U.S. government’s credit rating from AAA to AA+, citing erosion of governance over the past two decades.
S&P Global stripped the US of its AAA rating in 2011 in the wake of the previous fight to raise the debt ceiling. Analysts fear that the November closure will make Moody’s Investors Service the last of the three major rating agencies to have its top rating stripped.
Also read: Wall Street worries the U.S. could lose its previous AAA rating as political turmoil raises fears of a government shutdown
Some people are at much higher risk.Billionaire investor Ray Dalio speaks on Friday LinkedIn Postargued that McCarthy’s firing was a sign of increasing political polarization and was “another step away from democracy and civil war.”
Governance issues in the United States remain in the background for financial markets, and are unlikely to be a daily issue for investors.
“This is a problem, a big problem, but it’s not a new problem. So it’s important to link meta-problems that have been building up over not months or years, but actually decades, to current market trends. It’s difficult,” said founder Christopher Smart. He is a managing partner at the consulting firm Arbroath Group.
Mark Rosenberg, co-founder of the risk analysis firm GeoQuant (now part of Fitch), told MarketWatch that the U.S. is increasingly taking on some of the characteristics of an emerging market country, and that the “Governance risks are increasing,” he said, creating uncertainty over the state system. The basic policy direction of the government.
To be sure, the United States is not on par with emerging economies, he said. After all, U.S. Treasuries remain the world’s largest and most liquid financial market. U.S. assets have not been hit as hard as those in emerging markets.
However, the implicit context of political dysfunction “makes investors more uncertain about a variety of economic indicators, making these declines perhaps more extreme and uncertain than they would be with these unpredictable political patterns.” “We’re making it stable,” he said.
GeoQuant found a long-term correlation between measures of governance risk and the yield of the 30-year US Treasury bond BX:TMUBMUSD30Y (see chart below).
The United States is not the only developed market showing increasing dysfunction. It was a “clear articulation” of this phenomenon that last year saw the collapse in British government bonds, known as the “gilt,” shock across financial markets, forcing intervention from the Bank of England and leading to the resignation of Chancellor Liz Truss. said Rosenberg. He said.
Mr Truss and Finance Minister Kwasi Kwarteng’s “mini-budget” tabled last fall promised massive tax cuts for which there was no funding. Bond investors are betting on gold Treasuries, seeing that more borrowing is needed to finance the tax cuts and that the resulting increase in consumer spending could force central banks to raise interest rates further. began selling, and yields rose sharply. This caused enormous pain to pension funds, threatened the financial system, prompted BOE action, and forced a change in government direction.
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Weinberg said it’s a textbook emerging market dynamic: “A policy change and then investors bluffing against that policy change.” This is similar to what investors are used to seeing in emerging markets such as Brazil, Poland and Turkey.
“I don’t think the U.S. is there yet,” he said, but the decline in long-term U.S. government bonds coupled with concerns about rising debt burdens and dysfunctional politics over budget issues has been spectacular. be.
