The Debt ceiling debate and unintended consequences

As our political leaders were patting themselves on the back for averting a crisis — albeit with both sides of the debate frustrated they didn’t get everything they wanted, even those who got almost everything — a strange thing was happening in the markets. Equity indexes continued to tank.

Perhaps some analysts and pundits breathed a big sigh of relief when equities rebounded after a huger sell-off on Wednesday to close higher. No relief was in sight today as the Dow dropped more than 500 points and the S&P 500 dropped 55 pushing both indexes into the red for 2011. 

We see two possible explanations: fundamental and technical. First perhaps investors and the rest of the world where a bit shaken that a significant portion of our elected leaders would take us to the brink of default to prove a point. Basically that they would not be the first to blink.

 How much confidence can you have in an economy with such recklessness in high places going on? We pointed out last week that the debt ceiling debate was having real consequences. People and markets were working in a chance of a default — albeit a slight one — into their risk models. Margins rose and haircuts on Treasuries were increased. That meant funds had to be diverted from other things to cover that small downgrade in collateral.

That being said, the markets did seem a little toppy and last week’s sell-off pushed the indexes to some significant support levels that were taken out. So while you listen to blame get tossed around the next couple of days remember this move may be mostly technical.

More on this shortly.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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