Debt ceiling bigger threat for equity markets: Macquaire

Richard Gibbs, Macquarie Securities believes the debt ceiling (the deadline date is October 17) is a more significant negative trigger in relation to the fixed income market because of its impact on other risk asset markets, like equity markets around the world.

The shutdown of US government could be a based on the news that they are getting from Washington, says Gibbs. However, the shutdown if it takes the shape of the one that happened in 1995-96 then economic data will suffer the most. Below is the verbatim transcript of his interview on CNBC-TV18 Q: What is the sense you are getting if the shutdown indeed comes in the next one-and-a-half hours. Do you think Asian markets are going to go through a shudder? A: Looks like there might be a bit of a shudder. It is likely to be a partial shutdown at this point in time and it does look like that is the way we are calling at this point in time on the latest news from Capitol in Washington. It will be the first shutdown since 1995-96. The risk is if it becomes like 1995-96-shutdown and drags on for a number of months. The big loser in that sense will certainly be high frequency economic data which is critical at this juncture in terms of US policymaking. Q: The shutdown will be capped by the October 17 deadline for the debt ceiling. Do you think that as the market approach that date, there could be more than a shudder, there could be an actual selloff? A: Certainly the debt ceiling is much more significant in relation to the fixed income market and its impact on our risk asset market like the equity markets around the world particularly if we get a very loose talk as we had in 2011 about a possible default. However, bear in mind also that Moody’s and Fitch Ratings do maintain AAA ratings for the United States and have United States on a negative watch.  The S&P has already downgraded it to AA+. Therefore, it will bring about discussion whether or not we are going to see those two ratings agencies downgrade the US AAA rating. Q: When we saw the shutdown take place in 1995-96, the extent of the downfall in the S&P 500 was not too large restricted to less than 5 percent odd. Do you see the same play out? A: It maybe little larger this time mainly because the economy is not in its robust position as it was then. What we actually saw at that point in time on fixed income side in particular was stalling in terms of economic data, and at this juncture in the US – that high frequency data particularly labour market data is incredibly important in relation to the whole strategy of quantitative easing (QE) tapering. That is the thing that is now having an immediate impact on markets. It is providing support to the fixed income market because it looks likely that if they do not have that visibility in terms of data they won’t be moving towards implementing a tapering strategy.