The US debt ceiling
From our Market insight May 2023, we can see it was an eventful month for global markets. Growth assets have been impacted by the impasse on raising the US government’s $31.4 trillion debt ceiling and whilst unlikely, the consequences for a default would be catastrophic for global markets. In truth, markets have no way of pricing the risk of default, given it is unprecedented and the implications somewhat unknown.Â
On every single occasion since the 1960’s, the debt ceiling has been raised. This is because the consequences for default are simply too severe. It would leave the world’s largest economy in a major recession.Â
Capitol Hill has always found a way to overcome, and ‘five to midnight’ politics have always come in to play. The 1st June is not a definitive deadline, and much will depend on US tax flows in the coming week. Even if the 1st June is reached without a deal, it is unlikely to result in a default in US Treasury bonds. With contingency plans in place, we would see payments on US Treasuries prioritised over other US spending.
Global and growth
Turning to global growth assets, Japan has bucked the trend this month and was the best performing region. It stands out as a large developed Asian market that should benefit from China’s economic recovery, with an accelerating wave of improvements in its corporate governance.
Turning to factor performance over May, the growth factor was the best performer, with value being laggard over the month.
Defensive assets
Moving to defensive assets, both the US and UK 10-year yields increased. In the US this was down to the debt ceiling negotiations, whilst in the UK, the reason was inflation. CPI came in at 8.7% for April which was down from March’s 10.1% but significantly above the Bank of England’s forecast of 8.4%.
Market insight May 2023 – in summary
In summary, a protracted impasse on the US debt ceiling is creating a lot of noise around financial markets. Whilst history tells us a solution may be found, investors may continue to see volatility until it is resolved.
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