Financial experts warn of volatility due to the debt ceiling

Financial experts warn of volatility due to the debt ceiling

According to a report from www.businessinsider.de, the financial company BlackRock warns of possible drastic effects on the stock markets due to the debt ceiling crisis. This warning comes amid financial unrest due to the looming US default and rising interest rates making the market volatile.

The debt ceiling crisis could impact the stock market with further volatility and possible sell-off, BlackRock said. Already ten days before the deadline for raising the US credit limit, there are signs of unrest in the financial markets. The threat of U.S. default and rising interest rates are making bond markets more volatile than in 2011, the last time the U.S. risked default. At that time, the S&P 500 fell by around 17 percent between July and August 2011.

The debt ceiling crisis could therefore trigger similar volatility in the markets, further increasing the existing financial stress due to higher interest rates in the economy. This could lead to a sell-off and risk assets better price in the economic damage expected from interest rate hikes. BlackRock still recommends overweighting emerging market stocks as they could benefit in the short term from China's economic restart, the approaching end of central banks' tightening policies and a weaker US dollar.

The outlook for equities in developed markets, however, looks worse as the financial and economic damage from interest rate hikes and corporate profit forecasts do not fully reflect a recession. BlackRock has been predicting a new kind of volatility in financial markets for months due to the Fed's aggressive interest rate hikes in 2022. This combination of a debt ceiling crisis and rising interest rates increases the risk of a recession and renders old investment strategies obsolete. In addition to the risks of a US default, BlackRock warns that political disputes over raising the debt ceiling could lead to an economic crisis, as US debt plays a significant role in global financial markets.

The current political debate focuses on raising the debt ceiling and the possible conditions proposed by both sides. Republicans have proposed a short-term debt limit increase of $1.5 trillion in exchange for about $4.5 trillion in government spending cuts. However, the White House has rejected any conditions for an increase. President Biden and congressional leaders are expected to meet this week to discuss a possible solution.

Overall, the debt ceiling crisis and rising interest rates could lead to further financial unrest and volatility in the markets, potentially leading to a sell-off in risk assets and a pricing in of the economic damage from interest rate hikes. It remains to be seen how policymakers will respond to this situation and what impact this will have on the financial industry.