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Wall Street nervous about Washington as debt-ceiling warnings sound

The slim-but-increasing prospect of a fiscal crisis if Congress doesn’t act on debt limits is pouring in from growing U.S. investors and filtering into asset prices, though some believe That nation would eventually default.


“The next few weeks are a very packed legislative calendar and there are significant tail risks in the short term,” said John Adams, senior investment strategist at BMO Global Asset Management. “Our view is that eventually cooler heads will prevail.”


US markets are showing some signs of panic as the US Congress faces deadlines to fund the government and address the country’s $28.4 trillion debt limit. It has a September 30 deadline to prevent the start of shutting down government services. Secretary Janet Yellen has urged Congress to take action before October 18 to avoid “serious damage” to the economy.


“It’s not a big deal if the government shuts down,” said Randy Frederick, managing director of trading, “but if they continue to play the game with debt limits that could cause big problems” and financial markets as a whole. Could lead to a significant sell-off. Derivatives for the Schwab Center for Financial Research.


The rising prospects of Congress failing to act in time to prevent shutdowns or loan defaults were cited as contributing to the weakness of equities in recent days. Some analysts in the money market believe that concerns over debt limits have strengthened the US dollar.


The situation remains as it is. Democrats in Congress said Wednesday they would vote to call off an impending government shutdown before funding ends at midnight on Thursday. The House and Senate may vote on a separate bill that temporarily removes the debt limit, but Senate Republicans refuse to vote for it.


Nevertheless, since the United States has been vexed about this before, investors have taken a firm stand on the issue.


“It’s hard to know whether the market really cares about debt limits,” said Cathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “If you’re rational you probably don’t, because somehow it’s solved. On the other hand, it’s a risk you can’t ignore.”


Wells Fargo analyst Michelle Wan wrote Tuesday that investors have “so far given a shrunken response” to the impending deadline, with the complacency “implied in previous agreements that avoided defaults and other payment disruptions.”


However, panic related to debt limits is visible in the treasury bill market. Michael Purves, CEO of Tollbacken Capital Advisors in New York, wrote in a note on Monday that stress was seen in the pricing of three-month bills, which would “likely not be burdened by default risk” compared to one-month bills. Still, the more dramatic spikes in 2011, 2013 and 2015 are yet to reflect, Purvey said.


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