Thirty years ago, Donald Trump published a book called The Art of the Deal. But he displayed precious little talent for it in his first nine months in the White House. So the markets had quite a surprise last week when he announced a deal with the Democrats to pave the way for $15bn in disaster relief (see below) and to raise the US debt ceiling.
The debt ceiling is a limit on federal borrowing set by Congress to prevent overspending. In principle, the US would default on its debt if it goes over the limit. Instead, the ceiling has simply been raised or temporarily extended whenever the government, of whichever political hue, has approached it: 78 times since 1960, in fact. Each time a limit looms, both parties bicker more than usual and financial markets get rattled. Until last week, the ceiling was $19.8 trillion, which implied that the government would run out of cash in early October. Now, the ceiling has been nudged up and the administration will be able to fund itself until mid-December.
Though investors are concerned, this proves that Trump’s “bite is far weaker than his bark (or tweet)”, says Gillian Tett in the Financial Times: he had previously insisted that the debt ceiling could only be raised if Congress funded his wall on the Mexican border. “This, apparently, is now forgotten.”
But what might this mean for markets? It looks as though “fiscal discipline is kaput, and the budget deficit is headed higher”, reckons Randall Forsyth in Barron’s. According to Greg Valliere of Horizon Investments, Trump has sidelined the fiscal hawks among Congressional Republicans; he and the Democrats are both keen on tax cuts and spending on infrastructure.
House Speaker Paul Ryan needs to show that the Republicans can actually pass bills, so he might be inclined to support “pork-filled tax cuts, with something for everyone”. Higher state spending may “forestall the end of one of the longest postwar recoveries on record”, says Forsyth. That could imply yet more upside for America’s overpriced stocks, but it would be unwise to count on it.
Its far from certain that Trump’s apparent shift to the centre will endure, since he remains as unpredictable and unreliable as ever. His team has asked Congress to prepare to pass a tax bill, but he also says he wants it to produce an immigration bill in six months, “potentially derailing everything else”, says Tett. It remains “desperately hard for investors to price the risks about what might happen” when the debt deal expires, “or, indeed, to price the risks of Trump’s presidency in a wider sense”. All investors have really learnt about Trump is to expect the unexpected.
Wall Street takes shelter from Hurricane Irma
US equity markets breathed a sigh of relief early this week as Hurricane Irma shifted westward at the last minute; the uninhabited Everglades, rather than Miami, ended up in the eye of the storm. The S&P 500 promptly climbed to a new record closing peak. Even if Irma hadn’t changed course, however, it was never likely to detain the stockmarket for long. History shows that stocks “have proven resilient when facing damage done by hurricanes and other natural disasters”, as John Stoltzfus of Oppenheimer Asset Management told CNBC.com. The impact of a hurricane on the economy is broadly neutral, with a dent in output subsequently made up by a boost in construction spending as rebuilding gets underway.
Nonetheless, the short-term hit looks higher than usual this time, with Hurricanes Harvey and Irma likely to have caused $150bn-$200bn of damage, according to Mark Zandi of Moody’s Analytics. This has caused some nasty price declines among insurers, reinsurers and catastrophe bonds — assets that pay insurers if they suffer losses beyond a certain point. Buyers of the bonds are paid attractive rates of interest but could lose their principal if the worst happens.
Catco Reinsurance Opportunities, a London-listed disaster-reinsurance fund, has fallen by 15% in a fortnight, its worst performance since its inception in 2010. An index by Swiss Re covering catastrophe-bond prices fell by 16% in a week, the worst showing since 2002. Cat-bond investors will be keeping a nervous eye on the actual extent of the damage, says Robin Wigglesworth in the FT. There is much at stake: a record $6bn of cat bonds were sold in the second quarter of 2017, and the overall market is now worth $26bn.