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How Do We Interpret The Headlines?

The headlines about the market’s reaction to the debt ceiling debate are conflicting.  RBC writes “markets are betting on a rocky end to the debt ceiling debate roiling Washington, but if they are wrong, investors may miss out on the gains.”

Bank America on the other hand writes “investor indifference to the threat of a prolonged ceiling impasse has left a handful of tail risk strategies almost to cheap to pass up” further writing “the “derivatives tied to such assets point to very low probability of a crisis happenings, market derived odds now between 4% and 6%.”

The VIX, or the widely followed fear gauge, is around 17.5, hovering nominally higher than the all-time lows.

And then there are short dated credit default swaps on the Treasury which are more expensive than countries that have once defaulted including Greece, Russia and Brazil.

The headlines also suggest Washington may be “getting it.”  It appears almost every organization/trade group is pounding Washington to settle the debt ceiling now and end this financial brinkmanship.  It is not worth the cost to placate the party’s most ardent idealogues.

Yesterday’s the S & P 500 advanced about 1.1% on the above belief as both Speaker McCarthy and President Biden stated default will not occur and both sides are moving closer to a compromise.

Treasuries sold off across the curve.

What will happen today?

Last night the foreign markets were up.  London was up 0.64%, Paris up 0.99% and Frankfurt  up 1.68%.  China was up 0.40%, Japan up 1.60% and Hang Seng up 0.85%. Futures are flat ahead of a potential debt ceiling compromise in the coming days.  The 10-year is off 8/32 to yield 3.60%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.