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We get to the Treasury’s X-date and no compromise has been made on raising the US debt limit, or in other words the anarchists get their way. The most direct impact would be felt in the bond market as investors would be in a bit of a panic, rushing to move money out of fixed income. In this type of environment, cash and liquidity will be at a premium and risk will be sold across the board to cover losses on bonds and other credit instruments. Falling bond prices will push up market interest rates, which will in turn put downward pressure on stocks. An unlikely scenario worth considering is the historically inverse relationship between stocks and bonds that underpin the 60/40 portfolio model holding through the market disruption, whereby a sharp sell-off in the fixed income space results in a rally in stocks as a function of portfolios being pre-priced and re-balanced. More likely, the run-up in both stock and bond yields from falling prices could also mean precious metals become less attractive as they do not have a carry yield, and investors do not get paid to wait. There’s also a reduction in demand from an inflation hedging standpoint as rising rates signal less credit creation, which means less upward pressure on inflation from consumption and investment spending.
The implications for commodity markets would be similar to those of other risky asset classes. If US demand for fuel is seen as waning, the price of oil will have justification to accelerate its slide lower, which probably incites more production cuts from OPEC+. The asset class whose forecast is the most opaque is crypto, as the market reaction in the space will largely depend on how volatile the moves are among the other risky assets. For example, if the broader market sell-off is orderly the crypto space could indeed act as a safe-haven for alternative liquidity. If, however, the market sell-off is violent and abrupt, the crypto space will experience the proverbial baby being thrown out with the bath water, as investors flock to liquidity in the form of fiat currency. Most likely candidates will be the Swiss Franc, Japanese Yen, and the US Dollar which all typically hold the haven status in times of great market uncertainty.
The run-up to the ‘X-date’ will be filled with market volatility with a bias to the downside. With the level of uncertainty surrounding the risk of the US government not making debt payments, investors will rightfully shift holdings away from market risk and toward liquidity. As the adage goes, “America always does the right thing, after doing everything else.” If history informs expectations, then the failure to pass the TARP legislation on the first vote comes to mind. Political lines were drawn, and the interest of the American public became an afterthought. It wasn’t until financial markets responded with a massive sell-off that Congress saw the light and voted to authorize the bailouts. With this as prologue, it’s easy to see why investors are shifting to overweight cash. The expectation is that an adverse market reaction to Congress making wrong decision at first, would present opportunities to acquire premium assets at discount prices, shortly before the right decision is subsequently made and assets again reprice to reflect the new reality.

Since the lows of last October (2022), financial markets have rebounded higher in-line with the post COIVD re-opening of the Chinese economy and a simultaneous mild winter in Europe. At home, we have also experienced an exceptionally resilient labor market in the face of tightening monetary policy and subsequently credit conditions. Measures of inflation in the US economy are trending lower from their post-COVID peaks of around 10%, which is great news, but being above 4% is still nowhere near the Fed's target of 2% so its safe to expect more policy tightening from the central bank. The market reaction to more of the same from the Fed might be a little different going forward as expectations fall in-line with the economic reality the world faces. As inflation has been falling in the US over the past couple of fiscal quarters, so has the dollar as market participants anticipated an eventual pivot in monetary policy back towards accommodation and easy money. 
The coming couple of fiscal quarters will probably see the impacts of rising interest rates finally hit the labor market in a meaningful way. Thus far the recent memories of labor shortages during the post-COVID re-opening in the US, means employers are more likely to cut hours versus cutting headcount. The apparent labor hoarding has been supporting wages, which paired with falling inflation means consumers have been experiencing real increases in their income, albeit from depressed levels. Stocks markets have latched-on to this idea and are reflecting a world where economic activity slows just enough to bring inflation down, but not enough that lots of people lose their job as a result of the slowdown. Classic case of wishful thinking. 

The labor market tends to be a lagging indicator of economic activity, and so by the time businesses en-masse decide that its not worth holding onto a full staff and labor supply overshoots labor demand, interest rates would have been too high for too long and the damage would have already been done. As the summer months approach, market participants will have to adjust their expectations for economic activity in the back half of the year. Consider two scenarios: 1) The rate of change of the drop in inflation slows and the Fed keeps ratcheting up interest rates until economic activity grinds to a halt, and we get an acceleration in unemployment and inflation finally drops back down to the Fed target with a recession. 2) The long and variable lag in monetary policy is realized and market participants conclude the Fed has already gone too far as the rate of change of the drop in inflation accelerates taking it below the Fed target and creating an event sharper jump in unemployment, resulting in a recession. We are dealing with an issue of what flavor of recession will (not can) the Fed create. The difference being short and deep where there is a sudden drop in inflation and economic activity which the Fed can quickly address with interest rate cuts. Versus long and shallow where there is a grind lower in economic activity and inflation, to which the Fed's response will be hesitation to accommodate as they will fear a resurgence of inflation which would put them in the opposite of liquidity trap, where addressing one problem exacerbates another. In either scenario, the US consumer goes on the defensive and corporate earnings are directly affected negatively.

Let's kick things off in the risky side of the financial universe. For this analysis I look to the S&P500 and Crude oil as increases in their prices tends to signal an increased appetite for risk assets. Equities for example, reflect improving expectations for the economic outlook while Oil reflects improving expectations for economic activity. When the price of risky assets increase, financial markets are awash with optimism while the opposite is true when prices are falling. The S&P started its slide in right out of the gate in January 2022, while oil didn’t turn lower until later that year in June. Stocks eventually bounced off of a bottom made in October 2022 while oil prices began trading sideways between about $93/bl on the upper-side and $70/bl on the lower-side. 
Safe-haven assets were also trending very consistently for most of 2022 as well, the dollar was the only instrument an investor could have bought that appreciated for much of last year, until October when it too pivoted. Tied to the move in the dollar was a commensurate move in US10YR Treasuries as the bonds sold off to reflect the rising interest rates that were fueling the steady move higher in the dollar. Gold was an interesting vehicle to watch last year, despite a $440 swing in price from as high as $2,065 to as low as $1,625 gold began 2023 at roughly the same price as it began 2022, though it also experienced a sharp pivot in October.
So now let’s link market expectations to macro-economic implications. The S&P500 found support around the 3500 level in October, and risk sentiment improved as news of China reopening and ending the zero COVID policy they’ve had in place since to start of the pandemic. Interestingly enough, the oil market hasn’t reflected the enthusiasm. With escalating risk of interruptions of Russian oil as NATO ramps up military support for Ukraine, and OPEC all but promising more production cuts, oil should be trending higher. The lack of positive impulse in the energy market suggests some underlying deterioration of demand outside of southeast Asia as the China re-open is surely putting upward pressure on prices. Relative weakness in economic activity outside of Asia probably means relative equity underperformance as well. 
Last October into November, safe-haven assets made a U-turn as well, which roughly corresponded to what can be considered “peak Fed hawkishness”. The falling dollar is signaling investors expecting the Fed to pivot policy and stimulate before inflation falls to their 2% target, which was reflected in rising gold prices. The rally in the US10YR corroborates that idea, as a Fed pivot to rate cuts would mean investors demand for bonds at current rates increases. These market trends can continue, and indeed accelerate if when faced with a slowing or shrinking economy and rising unemployment, the Fed decides to change its narrative. If the Fed however, decides to stay the course and focus on bringing inflation back to it’s target, market dynamics could reverse quickly.
The direction of the dollar and the direction of oil could be the most telling indicators of both economic sentiment and activity. Equity markets are discounting mechanisms and so, try to look through the near-term and price for the medium-term, which doesn’t paint a very accurate picture in a rapidly changing economic environment. Demand for dollars is a little more immediate, as it measures liquidity needs, which are much harder to look through. So when demand for dollars increases, if sentiment turns negative from a drop in activity reflected in oil prices, investors will sell their stocks and even their gold to get their hands on more dollars. As a sidenote, this is the type of environment needed to force stocks and bonds back to an inverse relationship, undoing the last of the residual effects of the response to the Great Financial Crisis of 2008. Investors will buy bonds as the elevated nominal...

IJS Speaks is designed with traders in mind! Learning to trade and invest effectively often means navigating unchartered waters. Stability in financial markets is often dependent on multiple factors, so investors can find themselves struggling to keep up with the dynamic changes that can occur day by day or even hour by hour. We understand the importance of your investments, so the content we provide is meant to help investors and traders make confident market decisions.

IJS Speaks discusses trading tips and strategies designed to assist new and experienced traders in making informed decisions when navigating the financial markets. We examine market trends and make forecasts to improve profitability and minimize risk. 

We discuss a variety of investment vehicles, including the Spot Currencies, Fixed Income, Equities, and Commodities including Gold and Oil. Each episode will take a deep dive into why we expect projected movements financial markets in relation to current events in geo-politics and society. Our experts will provide step-by-step explanations of the rationale for our investment projections to assist investors and traders in evaluating their individual investment strategies. 

If you have not already done so, subscribe now to our YouTube Channel IJS TV for exclusive access to up-to-date trading tips, projections, and charting. Let’s get started on maximizing your investment potential!

IJS Speaks is designed with traders in mind! Learning to trade and invest effectively often means navigating unchartered waters. Stability in financial markets is often dependent on multiple factors, so investors can find themselves struggling to keep up with the dynamic changes that can occur day by day or even hour by hour. We understand the importance of your investments, so the content we provide is meant to help investors and traders make confident market decisions.

IJS Speaks discusses trading tips and strategies designed to assist new and experienced traders in making informed decisions when navigating the financial markets. We examine market trends and make forecasts to improve profitability and minimize risk. 

We discuss a variety of investment vehicles, including the Spot Currencies, Fixed Income, Equities, and Commodities including Gold and Oil. Each episode will take a deep dive into why we expect projected movements financial markets in relation to current events in geo-politics and society. Our experts will provide step-by-step explanations of the rationale for our investment projections to assist investors and traders in evaluating their individual investment strategies. 

If you have not already done so, subscribe now to our YouTube Channel IJS TV for exclusive access to up-to-date trading tips, projections, and charting. Let’s get started on maximizing your investment potential!

IJS Speaks is designed with traders in mind! Learning to trade and invest effectively often means navigating unchartered waters. Stability in financial markets is often dependent on multiple factors, so investors can find themselves struggling to keep up with the dynamic changes that can occur day by day or even hour by hour. We understand the importance of your investments, so the content we provide is meant to help investors and traders make confident market decisions.

IJS Speaks discusses trading tips and strategies designed to assist new and experienced traders in making informed decisions when navigating the financial markets. We examine market trends and make forecasts to improve profitability and minimize risk. 

We discuss a variety of investment vehicles, including the Spot Currencies, Fixed Income, Equities, and Commodities including Gold and Oil. Each episode will take a deep dive into why we expect projected movements financial markets in relation to current events in geo-politics and society. Our experts will provide step-by-step explanations of the rationale for our investment projections to assist investors and traders in evaluating their individual investment strategies. 

If you have not already done so, subscribe now to our YouTube Channel IJS TV for exclusive access to up-to-date trading tips, projections, and charting. Let’s get started on maximizing your investment potential!