October 19, 2021

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Fear of US government default pushes Wall Street lower - S&P 500 and Nasdaq indices fall sharply

Fears that the US government will default on government debt helped send Wall Street down – the S&P 500 and Nasdaq fell sharply

All leading US stock market indices opened on Tuesday, and the decline intensified after the trading day.

At the end of trading, it looked like this:

  • The heavy Dow Jones Industrial Average, which consists of 30 carefully selected companies, fell 1.63 percent
  • The Nasdaq Composite Index, which is dominated by technology companies, fell 2.83 percent
  • The Standard & Poor’s 500 Index, which consists of 500 of the largest listed companies in the United States, fell 2.04 percent.

The drop is exactly as expected – given the news picture, says Joachim Bernhardsen, chief strategist at Nordea.

“Right now, it’s the issue of raising the debt ceiling in the United States that is particularly characteristic of the markets,” he says.

Raising the debt ceiling means allowing the US government to raise more debt by issuing new government bonds.

US Treasury Secretary Janet Yellen has warned Congress that the US Treasury will be emptied quickly if the debt ceiling is not raised by October 18.

“It is important that Congress quickly increase the debt ceiling. If it does not, the United States will default on debt for the first time in history. Confidence in the United States will weaken, and our country will likely face a financial crisis and economic downturn,” Yellen says. According to CNBC.

– A tighter monetary policy was announced, which led to a decrease in support purchases from the US Federal Reserve. In addition, long-term interest rates are rising. The sum of it all affects the market, Bernhardsen says.

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Freeing up on US government bonds sent the “ten,” the yield on 10-year government bonds, as high as 1,558 percent. As recently as August, the 10-year-old fell to 1.13 percent.

Growth stocks are particularly affected by higher long-term interest rates, which is reflected in the Nasdaq’s 2.83 percent drop — the worst trading day since March, according to CNBC. Shares of technology giants Microsoft, Facebook and Google Alphabet all fell more than three percent. Both Apple and Amazon fell about 2.5 percent.

It takes into account the worst

Bernhardsen says it is unlikely that the US will default on all its debts, and that politicians will likely find a solution.

At the moment, the politicians seem largely locked up, and on top of that, the politicians have to adopt a new budget, a process that begins on October 1. If they fail, the United States may have to shut down some federal services, he says.

Politicians are likely to find a solution in the last hour, but there may be some noise down the road, says Bernhardsen.

According to Bloomberg, Jamie Dimon, president of major US bank JPMorgan, says they are preparing the US for the possibility that it could end up defaulting on government debt. Damon says, however, that he expects the problem to be resolved quickly, and that it will be “disastrous” if it is not resolved.

– Too serious about joking

Elisabeth Holvik, chief economist at Sparebank 1, told DN earlier today that she believes this is the show’s political game most of all.

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– They clearly agree in the end. This is too dangerous to joke about. US government bonds are the basis for all calculations in the financial markets, and a wrap around here would be very exciting, Holvik says.

Senior Economist Knut A. Magnussen at DNB Markets agrees.

– My opinion is that this will solve and raise the debt ceiling. American politicians will not default on debt. Magnussen says they know it wouldn’t be a smart move.

Holvik states that one has been in this situation many times before, with a seemingly insurmountable controversy right before the deadline, but resolved at the last minute. Sometimes the parties were so harsh that there was a “lockdown”, but an agreement was reached before the situation got out of hand.

Everyone really understands the seriousness, Holvik said, and no one has anything to gain from not solving this problem.

Debt ceiling controversy

In recent weeks, congressional politicians have been negotiating to raise the debt ceiling, without agreement. Traditionally, raising the debt ceiling has been a routine practice of Congress, but that was before the political fronts in the United States became so powerful that Republicans and Democrats could hardly cooperate on anything.

Mitch McConnell, the Senate minority leader, now says it’s inappropriate for the party to support raising the debt ceiling because that would be financially irresponsible. It comes after the party has routinely raised its debt ceiling under President Donald Trump.

Democrats believe Republicans are playing a political game to beat President Joe Biden, without putting the country’s interests first. They also argue that the main reason for raising the debt ceiling is the buildup of budget expenditures under the previous regime, particularly Trump’s tax cuts for the wealthy.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We want you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.

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