US data recovery to act as cushion for shutdown blow: UBS

Ramin Nakisa of UBS Investment Bank believes the US economy is in a good state of recovery and will help cushion the markets against the fallout of the US government shutdown.

According to him, the Republicans will be blamed more for the shut down, and therefore, they will make sure that the shut down does not affect the economy in the short-term atleast and will try and get the Obamacare scuttled through October debt ceiling negotiations.

Below is the verbatim transcript of Ramin Nakisa’s interview on CNBC-TV18 Q: What have you made of the global equity market reactions? They seem to have shrugged off this US shutdown completely?
A: That’s right and it was the same story with the outcome of the Italian actions by Berlusconi. We saw 30 basis points rise in Italian BTP 10-year rates. So, the markets are being very sanguine. It is a bad day for democracy but it is a good day for markets because they seem to have shrugged off these kind of political shenanigans. The maturity of markets has been greater than that of politicians over the last two weeks or so. Q: How would you approach the US debt ceiling debate which is due in possibly the third or second week of October? Would you give US debt ceiling more importance than the US government shutdown that happened today?
A: Definitely. If you cast your mind back to August 2011, when we saw this terrible market sell-off, it was based on debt ceiling negotiations and that is the key thing. Obama sees the Obamacare as his legacy and so, he will not back down on that because that is what he will be remembered for and therefore, it is the key to his tenure that it gets implemented. So, I don’t think he will back down on that at all.
Republicans are kind of split within their own party. A lot of republicans have been saying that this will affect them badly. Polls show that they will be blamed not the democrats for a government shutdown. So, what they are going to do is stave-off this shut down with short term patches and then they are going to try and get the Obamacare scuttled through this October debt ceiling negotiations. Q: Would you read the US market equities as complacent or very resilient?
A: So far they have been very resilient. However, we need to worry about what happen in the debt ceiling negotiations. Last time we saw the unwillingness to budge on either side and if we see that again then we will see a market correction in the United States. Q: What is the base case for the debt ceiling debate? What is the base case that the market is pricing in with respect to debt ceiling on October 17?
A: At the moment, the market is being very sanguine. So, they are presuming that there will be some resolution. The length of the shutdown will be brief and the effect on GDP will be minor. So, that is the central case and that is our central case as well. The Republicans will not want to be responsible for taking a big chunk out of GDP.
I think the US now is in such a state of recovery that it will be able to shrug off whatever is happening with the shutdown.