Senate leaders say they have reached a bipartisan deal that will raise the debt ceiling and re-open the government. While this yet-to-be divulged agreement will keep the country from defaulting, it's too late to undo some of the impacts already being felt.
Reports out of China, the single-largest foreign creditor to the U.S., are depicting America as a beggar that is broke and being run by bumbling incompetents. The ratings agency Fitch, unable to hold off any longer, has officially put the country's AAA-rating on watch for a downgrade by reducing its outlook on U.S. debt to negative from stable.
For veteran market-watcher Jack Ablin, CIO at BMO Private Bank, it's clear the U.S. has already suffered some "credibility damage" and yet he's still confident an outright default will be avoided.
"I think investors still believe something will get done, and will get done before we default on any of our obligations," Ablin says in the attached video, where he calls the Fitch move unsurprising and unlikely to gum up the interbank lending and liquidity dealings that are built upon the surety of AAA-rated Treasuries.
"Most shops say the Treasury collateral agreements have already been changed to address a potential downgrade," he says before switching gears to how a resolution might play out in the market, where the S7P 500 (^GSPC) has now risen about 1.5% since the government shutdown October 1st.
"I think we've moved on," he says. "We could see a little blow-off relief rally" if and when a deal is announced, but feels the recent gains have "essentially erased the entire drop that we've endured since start of the shutdown."
To that point, market technician Jonathan Krinksy at Miller Tabak points out that, prior to any deal, small (^RTY) and midcap (MDY) stocks have already rallied back to new record highs, with trading volume picking up and overwhelmingly positive.
In fact, Ablin says he thinks investors are anticipating something similar to the deal that was reached two years ago that saw the birth of the sequester and payroll taxes go up.
"The white knuckles and nail biting that occurred back in 2011, the result actually worked out pretty well," he says. "Turns out the sky didn't fall so we were able to make some incremental progress and move forward."
Let's hope so.
- Security Upgrades & Downgrades