Once again US politics is playing silly buggers, with the latest game of government debt ceiling chicken.
In that country, legislative approval is required for the federal government’s borrowings to surpass the previously determined cap.
That means that every few years this limit needs to be raised so that the world’s biggest economy can function. Otherwise the US government defaults on its debts and chaos would ensue.
The trouble is, every time the debt ceiling needs to be raised, political grandstanding takes over.
The Republicans, who control the legislative arm at the moment, insist on spending cuts in return for the ceiling being raised. The Democrats do not wish to cut services that the country needs.
So here we go again, with US Treasury secretary Janet Yellen reminding everyone last weekend that a deal needs to be done by 1 June.
That’s only a week away. Yikes.
Will the US default on its debts?
Understandably, this anxiety affects the confidence in US shares, bonds, and economy. But how about those Australians with S&P/ASX 200 Index (ASX: XJO) shares?
Firstly, despite all the puffing out of chests, many experts are tipping that an eleventh-hour deal will come through.
Ninety One strategist Sahil Mahtani is one of those who thinks the US will not default on its debts.
“We think a negotiated deal is most likely because first, unlike 2011 and 2013, deficit concerns are not in the foreground today,” he said.
“Second, Republicans are less united than in the early 2010s, when their majority in the House was also much bigger.”
Mahtani also suspects that president Joe Biden’s administration actually wouldn’t mind an excuse to cut some spending.
“The Biden administration may in fact want, sotto voce, some fiscal restraint given the current macroeconomic juncture. In 2011, unemployment was high, and inflation was low. Today it is the opposite.”
Time to hunt for bargains on the ASX
Elvest portfolio manager Adrian Ezquerro told The Motley Fool that the “political brinkmanship” would resolve itself soon enough.
“We expect a deal to be eventually done, with the result being a lift in the US debt ceiling, but it may well result in elevated market volatility in the meantime.”
He urged investors to take advantage of this and buy ASX shares on the cheap.
“Often these macro events, while worrisome at the time, provide good opportunities to put capital to work in high quality companies at cheaper prices,” he said.
“As such, we have our watchlist ready and are well positioned to accumulate target companies if protracted debt ceiling negotiations lead to a market correction.”
