Strong cycle while US debt limit risk is postponed – Danske Bank

Analysts at Danske Bank suggest that event risks have returned to markets after being away for some time, but at least for a few months, we do not have to worry about the US debt limit, after President Trump surprisingly struck a deal with the Democrats.

Key Quotes

“The deal includes Harvey aid for Texas, extends government funding and suspends the debt limit until December. The deal caught us by surprise, as we thought the administration would be willing to fight harder for a longer lasting solution to the debt limit issue – however, the Republicans seem to be surprised as well. While the deal merely kicks the can down the road, it means that in the very short term we only have to worry about the rising tensions with North Korea and the hurricanes hitting the US.”

“As we still think the probability of an armed conflict with North Korea is low and hurricanes usually just have a short-lived impact on the economy, it is difficult to be very concerned at the moment, especially as global PMIs suggest the world economy is in very good shape. Based on the VIX, it also seems that investors are calm, as it remains very low historically. While the postponement of a more long-lasting solution to the US government budget and debt limit issues means we may not see a short-term relief rally in the equity markets, we still think equities are a buy on dips in the short term, as the global economy is strong.”