A series of big market moving events is on tap for this month, as central banks gear up to confront the long-avoided issue of when and how to taper stimulus, against the backdrop of German elections and high-stake debt limit negotiations in the US.
Currency and bond markets hang in the balance as the European Central Bank decides on a timeline to end stimulus, with signals coming as soon as Thursday’s meeting of policy makers. Officials’ worries about the rise of the euro may push back details to the October meeting.
While Angela Merkel’s victory in German elections this month is all but guaranteed, she will need to cobble together a coalition. Some potential partners could complicate Brexit, including the FDP, which has been supporting Scotland’s anti-Brexit push.
Meanwhile the Federal Reserve is grappling with its own looming decisions on rolling back stimulus, as low inflation continues to confound policy makers. As Bloomberg reports, the tapering cannot come without risk to equities and economic growth:
So far, so good as 10-year yields hover near 2017 lows and U.S. equities sit within spitting distance of all-time highs. But don’t get too complacent that will endure, warns Deutsche Bank AG chief international economist Torsten Slok.
“Now, when QE is about to be reversed, I don’t see any papers or speeches talking about the coming big negative impact on equities, widening credit spreads, and boosting yields,” he wrote of monetary policymakers who championed the benefits of asset purchasing programs. “It cannot be asymmetric such that QE only has positive effects and reversing QE will have no negative effects.”
A possible US government shutdown should lawmakers fail to reach an agreement would have devastating consequences, as CNN Money reports:
Defaulting on any U.S. legal obligations is a treacherous prospect without real precedent. Markets likely would buck, and if the impasse isn’t resolved quickly, the economy would suffer.
And despite the fact that most expect Congress to come to an agreement as they have in the past, waiting until the last minute still has costs:
Past debt ceiling showdowns raised the country’s borrowing costs by hundreds of millions of dollars because investors hate uncertainty. It’s starting to happen again.
And just this week, the credit ratings agency Fitch said it would review the United States’ sterling AAA credit rating “if the debt limit is not raised in a timely manner prior to the so-called ‘X date.’”