Markets hopeful on debt ceiling

The United States government is expected to bump up against its legal borrowing limit by March, and it would be hard to fault investors for feeling edgy.

Reuters reported on Sunday, that the last fight over the debt ceiling led to one of the most volatile weeks in stock market history, cost the United States its top credit rating and pushed the government to the brink of default.

But this time around, markets are remarkably calm, with the benchmark S&P 500 barely budging on Friday after notching a five-year closing high on Thursday.

Some investors seem to be betting that Congress learned its lesson from the bruising debt ceiling fight of 2011 and will choose compromise over market meltdown.

Lawmakers remain far apart in their views. Republicans want the White House to agree to deep spending cuts in exchange for raising the $16.4tn borrowing limit. However, some conservative voices are warning against playing hardball with the debt ceiling.

?We played this game of chicken before and we all know how that played out and we don?t want to repeat that. The market knows this. Investors know it?s not going to be like 2011,? the chief investment officer at Harbor Advisory in Portsmouth, New Hampshire, Mr. Jack De Gan, said. ?I think the negotiation will go by with less volatility.?

Meanwhile, the CBOE Volatility index, Wall Street?s preferred anxiety gauge that is known as the VIX, ended Friday just a few hundredths of a point from its lowest closing level since 2007.

Of course, market mood can change in a heartbeat, and there?s still plenty of time for anxiety to rise.

Markets are still counting their blessings after Congress struck a last-minute deal on New Year?s Day to avoid some $600bn of automatic tax hikes and spending cuts ? measures that many had feared would drag the economy into recession.

But the deal to avert the ?fiscal cliff,? which included higher taxes for the wealthiest Americans, delayed some important decisions on spending.

That left Republicans with the chance to use the debt ceiling as leverage to get President Barack Obama to make cuts in Social Security, Medicare and other programs.

However, signs that some Republicans may not have the stomach for another fight have not escaped the notice of investors and traders.

In the equity markets, futures contracts on the VIX suggest expectations for rising volatility in coming months, but not at a rate that is considered alarming.

The managing director of active trading and derivatives at Charles Schwab, Mr. Randy Frederick, said investors have shown some interest in February VIX call options at 17, which is a bet on a rise in volatility around the time the debt ceiling debate is expected to heat up.

?I have not seen a whole lot of action,? he said. ?I think the market will stay in a trading range until we get closer to the deal. We still have three to four weeks until we get too uptight or worried about the situation.?

Prices of US Treasuries have also been fairly steady as investors weigh an improving economy against impending battles over the federal debt ceiling.

Some senior Republican figures have expressed concern about their party being blamed for a shutdown of the government or a debt default.

Former Republican House Speaker Newt Gingrich, whose decision in the 1990s to shut down the government rather than raise the debt ceiling backfired politically, told MSNBC this week that a repeat performance would be a ?dead loser? for the party.

In Thursday?s Wall Street Journal, Republican strategist Karl Rove said the party may have to accept a debt ceiling increase that doesn?t come with cuts to Social Security and Medicare programs.

?Having been defeated in the last election, the Republicans might not want to lose their last vestige of power, which is the House of Representatives, in the next one, so there may be some kind of incentive on both sides to get something done,? the senior bond strategist at TD Securities, Mr. Millan Mulraine, said.

?Of course, the market is very mindful that we have a very polarized environment in Washington that has manifested itself in almost every aspect of policymaking,? he added. ?But I still think markets expect a deal.?

That?s not to say investors shouldn?t prepare for the worst.

?These days, it seems like it?s dangerous to rule out anything,? the government bond portfolio manager at DoubleLine Capital LP in Los Angeles, Mr. Gregory Whiteley, said. His company oversees more than $50bn. ?We could see ourselves in a situation where neither side is willing to budge.?

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Source: http://www.punchng.com/business/international-business/markets-hopeful-on-debt-ceiling/

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