Following the agreement reached by Democrats and Republicans to raise the debt ceiling by up to $2tn on Tuesday, global stock markets have gone into a tailspin. At the time of writing, both the FTSE100 and S&P500 have lost over 7% during the last week, which is quite a correction.
I am not at all surprised by the markets' reaction. The wranglings over the debt ceiling were simply distracting investors away from a suite of very poor economic prints coming out of the US over the last month. Growth has stalled, consumers are keeping their dollar bills in their pockets, manufacturing has weakened and unemployment has increased. Indeed, jobs will be in the spotlight today as Non Farm Payroll data should prove disappointing. With the debt ceiling problem put aside for another day, investors have been compelled to accept that the US economic recovery is going to be weak for some time to come, and may even lurch back into recession.
If that wasn't enough, Italian and Spanish Bond yields continue to climb as bondholders demand higher compensation for holding sovereign debt. A default of either or both would be an event of seismic proportions and I currently sit in the camp that believes that both are "too big to fail" -however, remember that was also said about Lehman Brothers.
Safe havens during this turbulence have been UK Gilts, US Treasuries, quality Corporate Bonds and Gold. Advisory Client portfolios have been positioned in these areas for some time, and have been mostly unchanged during the last week. With this shakeout set to rumble on for a little while yet, caution remains the watchword.
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