There are just four trading days left until the United States hits its "X" day — the ominous-sounding hard deadline for the government to raise the debt ceiling or risk defaulting on its obligations, according to the US Treasury. Investors are starting to squirm.
It's not like this took Wall Street by surprise.
The US government hit its self-imposed debt ceiling back in January, forcing the Treasury to start taking extraordinary measures to keep the government paying its bills and escalating pressure on Capitol Hill to avoid a catastrophic default. Treasury Secretary Janet Yellen has been warning of a June 1 deadline for nearly a month.
US markets have largely shrugged off talk of a default. All three major indexes climbed higher last week. And analyst notes discussing the topic have been heavily caveated that there's a near-zero chance of an actual default.
"A debt ceiling deal is a certainty and every market actor knows it," wrote David Bahnsen, chief investment officer of The Bahnsen Group on Wednesday.
But, markets have experienced a vibe shift in the last 24-48 hours. The Dow plummeted more than 250 points Wednesday as investors appeared to wake up to the reality that for the first time in US history, the government could renege on its bills. Treasury yields, which move in the opposite direction to prices, were higher as worries of a default grew.
What's happening: Negotiations between President Joe Biden and Republican House Speaker Kevin McCarthy are hitting snags and time is running out.
House Republicans are insisting on spending cuts before they will agree to raise the nation's debt ceiling past $31 trillion. Democrats argue Congress already spent the money and must be allowed to repay America's debt holders without an embarrassing and economically disastrous default.
Fitch — one of the top three credit rating agencies along with Moody's and S&P — signaled on Wednesday evening that it could downgrade the United States' perfect credit rating if lawmakers do not agree to raise the debt limit.
The warning is "just the latest sign that policy brinkmanship over the debt ceiling is extracting a growing price on the US economy and placing in jeopardy well-functioning financial markets that are critical to the health of the American real economy," said Joseph Brusuelas, chief economist at RSM LLC.
Market reaction: As it becomes less certain that an agreement will be reached and more likely that a default could occur, investors have soured on markets quickly.
"In the absence of a deal, we're gonna see the markets pay more and more attention to this," said Megan Greene, global chief economist of the Kroll Institute. "But even with just brinkmanship, you end up having an impact on the markets and the economy."
It's hard to say what comes next, said Greene. There's so much uncertainty around what would happen if the US did default on some of its debt obligations, simply because it never has before, she said. "It's hard to price that in the markets."
What comes next: Even if the US avoids a default, markets could remain moody, said Steve Sosnick, chief strategist at Interactive Brokers. "If a debt resolution results in tighter fiscal policies, it would create yet another hurdle for stocks and the economy," he wrote in a note. Tight fiscal policy means less government spending or higher taxes.
If there's concern over a slowdown or even a recession in the US, he said, "then a fiscal bump would be a boon, while a fiscal cut would be an additional headwind — at least in the short-term."
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