Market Impact of Debt Ceiling Deal

Clifford Bennett, Chief Economist ACY Securities shares his perspective on the potential impact of a debt ceiling deal with Kyle Rodda on The Open at ausbiz TV.

There has been a relief rally in the market due to various factors, including the resolution of the debt situation. However, despite the short-term positive effects, a market correction is imminent.

Although people were cautious leading up to the debt ceiling crisis, they didn't expect it to actually happen. The possibility of a technical default suggests that even if a default occurs, it wouldn't have a significant long-term impact. Highlighting the growing US debt and the dire state of the US economy as reasons for concern.

Despite the liquidity in the system and low interest rates, the fundamentals of the US economy are not favorable, with manufacturing in contraction and property prices falling. There are also concerns about the banking crisis, with the possibility of several hundred banks could go under in the next 12 to 18 months.

Regarding the Federal Reserve meeting, there is a belief they will likely pause further rate hikes due to the slowing economic outlook and the potential worsening of the banking crisis. The market should not expect rate cuts due to high inflation.

The conversation then touches on the observation that the current rally on Wall Street is driven by a narrow group of stocks. While there may be a justification for the repricing of certain stocks, it is suggested that it may have gone too far, causing concern for the broader market.

In conclusion,  caution should be considered and the relief rally resulting from the debt ceiling deal may not be sustainable and market participants to consider the broader economic outlook rather than solely relying on liquidity and low interest rates.