TeleTrade: Markets Want a Multi-Trillion Package, Not Just a Raise in the Debt Cap

The situation this time seems to be closer to a critical point than ever before.

Last night, the U.S. Senate approved a legislation to temporarily raise the $28.4 trillion debt ceiling after weeks of political battles.

This allowed the federal government to increase its Treasury Department borrowing by $480 billion, to avoid the risk of a historic default, but only until early December.

Before this time, the attention of the Congress will have to return to the problem again to come up with a more inclusive and rounded solution. 

The situation this time seems to be closer to a critical point than ever before, so much so that Goldman Sachs bankers, for example, even officially warned their clients the day before about the possible consequences, and that the loss of borrowing authority in the United States poses a real risk for the market.

However, a few hours later, this act of “raising the ceiling” performance was successfully staged when the Senate’s minority Republican leader Mitch McConnell said Republicans were open to a temporary hike.

He did this after blocking all Democrats’ attempts twice, but even that announcement was followed by more negotiations behind closed doors to secure more Republican votes. The Senate voted 50-48 to pass the bill, and now it goes to the House of Representatives, which may hold a vote on Tuesday, according to the office of Steny Hoyer, the No. 2 House Democrat.

Wall Street breathed a sigh of relief. The S&P 500 broad market gained 0.83% on Thursday, and what is more important, closed above a psychological level of 4,400 points for the first time in October.

By the way, the news from the White House about the upcoming talks between President Biden and Chinese leader Xi Jinping on a wide range of issues was also a positive signal for the market which greatly helped almost all Chinese depositary receipts on Wall Street like Alibaba (+8.26%) or Pinduoduo (+6.30%) to sharply move higher.

However, even all combined factors did not provide markets with full bullish confidence, at least for now, as the S&P 500 futures failed to create a foothold near its maximum achievements on Thursday, although the index reached a higher 4,430 points landmark at some moment, seemingly opening the way for more brave bets on a wider range of stocks.

Why does the market remain concerned to a certain extent, although there is still plenty of time until the next December deadline when a final decision concerning the debt problem will be made?

Some influential Republicans like Lindsey Graham called yesterday’s compromise “a complete capitulation”, and they may not support the new truce next time, but that’s not the main danger.

The Republican leader McConnell supported the last-minute salvation from the government’s technical default now, but he is still expected to insist that the next raising step of the debt ceiling should be achieved through the so-called time-consuming “budget reconciliation” process, which would allow the passage of the final bill without any votes from his party at all.

Such a demarche could make positions of Republican candidates stronger before the 2022 congressional elections as they pretend to be fiscal conservatives – even though most of them previously supported the same kind of measures during Republican Donald Trump’s administration.

McConnell said last night in a Senate speech: “Now there will be no question. They’ll [Democrats] have plenty of time” to pass the next increase using reconciliation”.

This will greatly complicate things, including the procedural issues because of a sadder fact that the Democratic Party itself became so heterogeneous on this issue that it could not come to any internal agreement in recent weeks.

The White House is proposing two massive spending bills on the U.S. domestic agenda, including a $3.5 trillion package for a more generous social policy and a $1 trillion bipartisan infrastructure bill.

But only a part of a wide Democratic wing totally supports the suggestions, while other Democrats are also playing the role of conservators as they are asking for the shortening of expenses to just $1.5 trillion while trying to put the spending legislation in tandem with the final agreement with a final bill on debt ceiling.

It’s easy to understand all patriotic aspirations of the Congress members as well as the White House’s plan to use a lion’s share of additional trillions of Dollars after collected as a new debt after raising the ceiling, for this money could simultaneously work for the sake of the economy and the social sphere, raising not only the ceiling for the debt but also the income of their American electorate.

They do not want to use almost all borrowed money to just pay interest on the old, accumulated debt, which will put the situation into the same circle of repeated decisions later.

Earlier, Treasury Secretary Janet Yellen and President Joe Biden, openly announced that without raising the ceiling, America really would not even be able to service interest on its enormous debt, so the last passage is not an exaggeration or a metaphor.

However, while some Democrats are still engaged in populist promises, some of them may actually care about the economy or the social sphere, and others may want to save money, which may solve the debt issue for a minimum instant price for the American financial system.

It will be quite problematic to agree on a joint position even within the Democratic camp. In any case, when the Republicans asked them to do this, so that the Democrats would offer them a bill with a specific final amount to go towards raising the debt ceiling and package spending, the Democrats have not yet been able to do this, citing lack of time.

Most likely, of course, an additional two months will lead them to some settlement, so the very threat of a default remains mostly an illusory one.

But the market fears, apparently, not a default, but that it will be prevented by the price of accepting a very narrow package with only minimal costs for the economy and social sphere.

To keep optimism in an upside rally, the markets want a $3.5 trillion package that would help both the faster economic recovery and the strengthening of the inflation rally on Wall Street, as they believe part of the package money definitely would come to the stocks segment, and price pressure may help too. Yet, the investment community is not sure that Democrats will be able to agree on such substantial spending, even with a clear formal majority in Congress.

Ilya Frolov, Head of Portfolio Management, TeleTrade

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don’t represent a recommendation or investment advice by TeleTrade.

Got a news tip? Let Us Know