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For weeks, Democratic President Joe Biden and Republican Speaker of the House Kevin McCarthy have been pitted against each other in a dispute over raising the US debt ceiling. During the last debt crisis in 2011, the two heroes were Barack Obama and John Boehner. Just like today, investors back then hoped that the drama of delaying a resolution would be resolved as soon as possible.
Then things turned out differently than he had planned. On August 1 and 2, 2011, Congress and the House of Representatives approved the debt ceiling increase only with considerable delay. US stock markets had not yet reached their bottoms, as the rating agency Standard & Poor’s announced on August 5, 2011 that it would withdraw the US’s highest credit rating after the close.
When American stock markets reopened, the Dow Jones index fell more than 5 percent in a single day. Although Wall Street strategists later reported how much of a negative impact this would have on the United States, the stock market soon bottomed out.
Stocks shake regularly before day X
In retrospect, it seems that financial markets were in a bearish trend even before the so-called X-Date, when payment default occurred. However, this negative spiral did not affect the overseas stock markets, where the S&P 500 Index fell by 15 percent during its peak.
The Swiss Market Index (SMI) minus 22.6 percent and the DAX (-25.79 percent) fell under the wheels. Another reason why European stock markets have recorded higher price losses than the US stock markets is that the European debt crisis surrounding Greece continues in full swing and has a heavy impact on the euro area financial markets.
Gold prices benefited the most from the political hiccups in Washington and the euro debt crisis. It increased 21 percent in 3 months. It is not surprising that various banks still recommend investing in gold. In a note to clients on Tuesday, UBS states that gold is an effective portfolio diversification and hedging tool. The major bank expects the yellow metal to reach $2,250 an ounce by June 2024.
Commerzbank economists, who expect interest rates to drop, also praise the precious metal and say gold prices will benefit more than any other investment if the US defaults.
I’m looking for Franconia as a safe haven
“One of the reasons why gold is a safe haven is that it does not generate interest and therefore remains unharmed in an environment where monetary policy easing is likely and yields will decline accordingly.” This gives gold an advantage over other traditional safe-havens, such as the US dollar, Swiss franc and Japanese yen right now, in particular.
But in retrospect, the Swiss franc was able to distinguish itself as a safe haven in 2011. During the US debt crisis in 2011, the dollar also depreciated heavily against the Swiss franc and was priced 12 percent lower at its peak.
The Swiss franc followed a flat course against the euro after the Swiss National Bank (SNB) set the minimum exchange rate per euro as 1.20 francs on September 6, thereby stabilizing the exchange rate between the euro and the franc.
Going out is not worth it
Strategists are correspondingly cautious about their outlook at the moment. Gilles Moëc, chief economist of Axa Group, is cautious. “As long as the market assumes that reaching the debt ceiling will be a very short-term event, the bond market reaction may be moderate. But at the same time, we expect the stock market and the dollar to struggle.”
UBS recommends making the portfolio as durable as possible. “In our global strategy, we prefer bonds over stocks and believe that higher quality bond segments offer both attractive absolute returns and a hedge against growth and financial stability risks.” In the stock field, dividend and quality stocks should be preferred to increase the return.
Not necessarily sold on exchanges
As the European debt crisis also peaked in the summer of 2011, stock markets will not be selling as sharply as in 2011 this year. Quitting completely is not the solution either. Because in 2011, stock markets recovered after the losses between the beginning of June and mid-August and gave signs of recovery towards the end of the year. The S&P 500 index and SMI fell 4.7 percent and 4.0 percent, respectively, from the value at the beginning of June.
It is also interesting that the gold price could not maintain its price increases of 25.8 percent in the meantime and increased by only 4 percent at the end of the year. The US dollar, on the other hand, made a bright comeback: it rose 11.29 percent against the Swiss franc at year-end. This was because high yields in the US bond market were seen as attractive. In Switzerland, on the other hand, the SNB heralds a zero interest rate policy by pulling the base interest rate target range between 0.00 and 0.25 percent.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
