While the Fed and its response to US inflation appear to be the main drivers of the selloff and increased volatility in markets,they are not the only sources of anxiety and threat for investors.
The clock is ticking ever more loudly onthe US debt ceiling impasse,with the US Congress running out of time to raise the ceiling and avert an unprecedented US government default on its borrowings. The Biden administration has been using “extraordinary” measures to eke out its remaining cash and stave off a default.
Since 2009 markets have,despite the odd bout of turbulence,ignored every increase in risk – and sluggish economies to post record after record,stretching historical valuation metrics to their limits.
Treasury Secretary Janet Yellen told Congress on Tuesday that there would be “catastrophic” consequences if the lawmakers failed to raise the debt limit,including a self-inflicted US recession and a financial crisis.
While Congress has often indulged in brinkmanship over the debt ceiling in the past and the Democrats do have a course to raising the ceiling without Republican support,albeit one that could take several weeks to execute,the administration is running out of time. Yellen said the extraordinary measures would be exhausted by October 18,if not before.
If there were to be a default,social welfare payments would be delayed,armed service personnel wouldn’t be paid,the rates on credit cards,car loans and mortgages would rise and the US dollar’s status as the world’s reserve currency would be jeopardised,Yellen said.
While it is probable that either the Republicans will blink or the Democrats will reluctantly press ahead alone,past episodes suggest there could be significant financial markets turmoil as the deadline nears.
Treasury Secretary Janet Yellen told Congress on Tuesday that there would be “catastrophic” consequences if the lawmakers failed to raise the debt limit,including a self-inflicted US recession and a financial crisis.Credit:Getty
There are other reasons why the markets might have suddenly become more volatile.
The oil price briefly rose above $US80 a barrel on Tuesday – it’s highest level in three years – before slipping back to $US79 a barrel. Higher oil and soaring gas prices have been factors,albeit not the only ones,in an energy crisis in the UK and Europe and power rationing in China.]
The sea-change in China’s economic landscape as Xi Jinping presides over a major and disruptive shift in economic strategy and China’s economic model,andthe threat illustrated by Evergrande’s implosion to an inflated and over-leveraged property sector,are other sources of concern and risk for the markets.
Since the 2008 financial crisis China has been the engine for much of the world’s economic growth but that engine is sputtering,
China’s growth is now slowing andthe abrupt crackdown on tech companies,the teetering property sector and the impact of efforts to reduce China’s carbon emissions on its power generation and industrial sectors are threatening unintended,but potentially quite destructive,consequences.
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The outbreaks of the Delta variation of the coronavirus,the continuing global supply chain chaos,sliding consumer confidence,the Republicans’ frustration of Joe Biden’s ambitious economic and social agendas and an apparent peak in the surprising surge in corporate profitability during the pandemic are other elements of a complex mix of risks and uncertainties confronting investors.
Since 2009 markets have,despite the odd bout of turbulence,ignored every increase in risk – and sluggish economies to post record after record,stretching historical valuation metrics to their limits.
They do look particularly fragile and vulnerable today and do face a plethora of threats but,as has been the case since 2009 – and will remain the case unless and until US interest rates have been restored to pre-financial crisis levels – there remains a dearth of positively-returning alternatives.
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