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Will a Government Shutdown and Debt Ceiling Crisis Rock the Equity Markets?

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President Trump has made it clear that if the Congress doesn’t give him the money to build his pet project – a wall along the border – he will not sign any bills. If this impasse is not sorted out by September 30, it will end up in double chaos.

Key points

  1. We have a stalemate between the Congress and the US President
  2. Stock market’s performance has been mixed during debt ceiling crisis and government shutdown
  3. The debt ceiling crisis in 2011 was followed by a credit rating cut, which led to a huge correction in the equity markets
  4. Goldman Sachs sees only a 35% probability of a government shutdown
  5. We believe that the equity markets will not remain sanguine if an agreement is not reached in time

The US economy will have to face the consequences of a government shutdown and fears of some kind of default for failing to raise the debt ceiling on time. Let’s see how these events have influenced the stock market in the past and will history repeat itself this time?

What is a government shutdown and a debt ceiling?

In simple terms, debt ceiling is the limit on the amount of debt that the US Treasury can issue for financing various government expenditures. If the debt ceiling is not raised in time, the US Treasury has to resort to “extraordinary measures” to fund government expenses. However, if the situation drags longer, it can even lead to a default, a catastrophic event for the economy and the equity markets.

The United States Constitution has empowered the United States Congress to appropriate funds for government operations. The appropriations bill is first passed in the House of Representatives and then by the Senate after which it is sent to the President who either signs the bill or ignores it. Under both conditions the bill becomes law.

However, if the President vetoes the bill, it is then sent back to the Congress, which can override it with a two-thirds vote. Nonetheless, if both the Congress and the President fail to sort out the logjam, the government will have to shutdown non-essential operations and obligations for paucity of funds, sending thousands of federal employees on furlough.

How many times has this happened in the past?

US Government shutdown

Most of the government shutdowns prior to 1980 were confined to the political circles because the federal employees continued to work and were paid retrospectively when an agreement was reached. However, in 1980 and 1981, the then-attorney general Benjamin Civiletti gave his legal opinion that the government work has to stop until Congress agrees to fund it.

Since then, there have been 12 shutdowns. The longest was from 15 December 1995 to 06 January 1996 that lasted 21 days. The last shutdown was in 2013, from September 30 to October 17, lasting 16 days during President Obama’s tenure.

Debt ceiling crisis

The Wikipedia has listed 87 instances of debt ceiling changes since 25 June 1940. On most occasions, there was no major damage to the economy, however, the 1995 debt ceiling crisis led to the longest government shutdown in the US history.

The crisis in 2011, though resolved at the 11th hour, led to a credit rating downgrade of the US for the first time by the credit-rating agency Standard & Poor’s from AAA to AA+. Similarly, during the debt ceiling crisis in 2013, credit rating agency Fitch Ratings placed the US under a “Rating watch negative”.

How did the various markets respond during the previous two debt ceiling crisis?

Source: Seeking Alpha

Leading to the previous two debt ceiling crisis, the stock markets fell in 2011 but rose is 2013. On the other hand, the US dollar fell marginally, whereas, the Treasuries rallied during both occasions.

However, that is only half the story because, in 2011, the markets fell sharply after the debt ceiling crisis ended because of the S&P credit rating cut. However, in 2013, the markets continued their journey northwards even after the crisis ended.

Similarly, during government shutdowns, the equity markets have been mixed. Nevertheless, on an average, they have fallen 0.6% over the period of the closure, according to LPL Financial.

Source: Market Watch

This shows that the government shutdowns have not materially affected the stock markets. So, will the current deadlock also be uneventful for the equity markets?

What is likely to happen this time?

The economic situation and the political backdrop during every shutdown or a debt ceiling crisis is different. Let’s see some expert opinions this time.

Goldman Sachs, which two weeks back had given a 50% chance of a government shutdown has reduced it to 35%, following the catastrophic storm Hurricane Harvey. Goldman believes that no political party will want to own the blame of obstructing federal relief works underway, hence, the change in forecast.

Analysts at Morgan Stanley, however, are of the opinion that a solution will neither be easy nor smooth. According to them, a sharp fall in the markets may be needed to pressurize both sides to arrive at a compromise.

Isaac Boltansky, director of policy research at Compass Point Research & Trading in Washington said, “I think this time will be worse because of the uncertainty from President Trump,” reports The New York Times.

However, a few others maintain that both the issues will turn out to be a non-event for the stock market. Most shutdowns “don’t last long and equities rarely see a large sell-off,” wrote Ryan Detrick, senior market strategist at LPL Financial in a report on Thursday, reports CNBC.

We expect the markets to fall this time if timely action is not taken

The stock markets have risen sharply since the US Presidential elections of last year on hopes of tax reforms and higher fiscal spending. Also, both the bull market and the economic recovery cycle are on its last legs and a dip is likely, if history is any guide. However, as the bull market progresses, the market participants become complacent. This time too many believe that a compromise will be reached in time.

However, if the President and the Congress fail to arrive at a compromise in time, traders will start to question the possibility of any meaningful tax reforms going through. This will lead to a dent in confidence, which is likely to lead to a sharp fall.

On the other hand, if the political parties show a united front and find a middle path, it will be a morale booster and the equity markets are likely to rally to new lifetime highs.

Therefore, the current gridlock will move the markets one way or the other.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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GBP Price Prediction: British Pound Jumps on Growing Backing for PM May’s Brexit Deal Ahead of Vote

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  • GBP catches a bid across the board as Prime Minister Theresa May gains ERG support.
  • Despite session gains, GBP/USD technically has vulnerabilities to downside risks, given rising channel formation.

GBP Bulls Awaken

The British pound (GBP) saw a decent jump to the upside on Monday, after an initially very choppy directionless start to the session. The buying swooping into GBP/USD came on the back of a growing number of ministers set to back Prime Minister Theresa May. Specifically, attention was grabbed after closely followed political watcher Robert Peston tweeted that “influential Tory Brexiter MP tells me he and his ERG Brexiter colleagues will be voting with Theresa May and the government all day tomorrow”. This is significant as the ERG is a very influential Brexit research group, which was previously plotting ways to oust PM May.

GBP/USD jumped to its highest level seen since 22nd November. The pair had seen an initial spike of 85 pips to the upside. Gains were capped however by a known strong area of supply; this can be seen tracking from 1.2870 up to 1.2930. The price has not been above here since 15th November 2018, and the bulls having faltered here on several occasions attempting to move above. Should GBP/USD manage to move above this zone, it would be a very strong signal that it is out of the bear market. Technically, this would be largely attractive for inviting further buyers to come in.

A detailed analysis of the upcoming Brexit vote can be viewed here: This Tuesday Will Be Zero Hour For the British Pound

Price Remains Confined Within Channel

GBP/USD daily chart. Price action remains within the confinements of a rising channel.

Another key technical observation is an ascending channel formation, which can be viewed via the daily chart. The GBP/USD pair has been moving within this since 12th December 2018, having gained over 400 pips since it took shape. The daily candle today briefly spiked above the upper tracking trend line of the pattern. However, the price was squeezed back within the confinements of this. Touted profit-taking kicked in towards the close of the European markets. This is not too surprising, as participants maintain an element of caution heading into the high-profile vote.

Given the nature of the above-described formation, should it play out to the textbook, vulnerabilities still point to a breakout south. This move would be heavily assisted should the British Prime Minister lose the meaningful vote on Tuesday. In terms of key levels to note, to the upside, a break above the 1.2930 supply zone will invite large buying pressure. To the downside, a breach of 1.2650, the lower support of the channel, will open flood gates to selling.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 110 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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GBP/USD Price Prediction: GBP/USD Pump and Dump Eyed

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  • GBP/USD has been rallying heading into the crucial vote on Theresa May’s Brexit deal with the EU.
  • Markets could very well be making room for a big sell-off, depending on the outcome.

Markets Expect PM May to Fail

GBP/USD surprisingly has been making its way north, as the price on Friday made one final big push for the week. This comes despite the crucial vote on Tuesday 15th January, where UK parliament will vote on PM May’s EU deal. It appears the market is strongly anticipating the Prime Minister will lose this. As a result, the case for this is already being priced in.

Despite the fact the markets are expecting this sort of outcome, there could still very well be room for a large fall for GBP. This rally being observed may be the pump, making room ahead of it encountering a large dump. In terms of this type of behavior it has been seen time and time again ahead of big market moving events.

In these heightened times of uncertainty, both economically and politically, GBP/USD has still managed to close in the green for four weeks running. It has moved to its highest levels seen since week of 26th November. This has been the longest weekly run observed for the pair, going back as far as August 2018.

Key Technical Levels

GBP/USD 4-hour chart.

Looking via the 4-hour chart view, an ascending channel formation can be eyed, which has been in play since 11th December. Despite the freak mini touted flash crash on 2nd January that rippled the markets, GBP/USD has respected this pattern. The price has been grinding higher within this, having gained almost 400 pips.

The bull run on Friday was capped by the upper acting trend line, which is tracking at 1.2860-70. It did print its highest level since 22nd November in that latest squeeze higher. Given the further wave of uncertainty that will hit the market next week, the price will likely continue to respect this channel. Keeping in mind the recent rejection on Friday, price pressures to the downside could be eyed at the open. Support levels to note via the 4-hour; 1.2770, 1.2716 and then 1.2660.

GBP/USD weekly chart.

In terms of the weekly chart, should the bulls intend to resume the upside pressure, they will need to break down 1.2870. This is a resistance area and a break and close above can open the door for a return to the psychological 1.3000 mark. To the downside, big weekly levels to note are 1.2770 and 1.2660. Any failure of those mentioned holding, then a fast move back south to a demand zone tracking from 1.25-1.2400 is to be expected.

Featured image courtesy of Shutterstock.

 

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 110 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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GBP/JPY Price Prediction: Pressure on the Pound Likely to Intensify Ahead of Next Week

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  • GBP pressure to the downside could start to pick up pace, heading into the vote on Theresa May’s deal with the EU.
  • GBP/JPY has a chunky amount of room to potentially free-fall, depending on Brexit developments.

Theresa May’s Deal with EU Vote

The British pound (GBP) is heading towards a critical event next week. Members of UK parliament will be voting on Theresa May’s draft withdrawal agreement with the EU. As a reminder, this was originally set for 11th December, however the PM was forced to delay this, as she was facing defeat. Despite this having been postponed the first time round, things remain very much up in the air. There is still a strong potential that she will not gather enough support to see this deal pass.

Prime Minister May only has a week now to try corral required support for her deal. She must gather enough support in order to get it passed through parliament. In terms of the schedule of events, the vote will be preceded by four days of debating within the House of Commons. This will be commencing on Wednesday 9th January.

GBP/JPY

GBP/JPY daily chart. The price is vulnerable to further downside shocks.

Looking at GBP/JPY via the daily time frame, the candlestick for the session today – 8th January – is a bearish signal to say the least. A strong area of demand was initially seen at the range of 140.50-139.50. Most recently the price was consolidating around this region, from 21st to 31st December 2018. This was the case until the hard sellers smashed through. On 2nd January, a breach through the active support occurred, inviting chunky selling activity into play. GBP/JPY was hit once again harder on 3rd January, a continuation of the first breakout, but exacerbated by the mini ‘flash crash’, which was seen across all JPY instruments.

GBP/JPY monthly chart. Eyes on potential retest of huge monthly support area, seen at mini flash crash low print.

Keeping in mind the above, the price did initially retest the breached demand zone and was hit with a rejection. This technically signals further potential downside to come. Given how aggressive GBP/JPY can be generally, with the Brexit pressure further intensifying now, this could be extremely vulnerable. As a result, bear targets are somewhat deep. Firstly, the 136.00 figure, which is the low area of 4th January. Further to the south, eyes would then even be on a fast move back towards the flash crash low print, 130.70. This area is big in terms of monthly support, it came into action back in the months of July, August and September 2016.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 110 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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