- Wall Street's biggest names are warning of stock-market turmoil as the debt-ceiling standoff continues.
- The government could run out of cash in just two weeks, according to some policymakers.
The debt-ceiling face-off has become the latest worry for Wall Street in a year when investors were already fretting about banking turmoil, rising interest rates, and a looming recession.
BlackRock, JPMorgan, and Morgan Stanley all said Monday that the ongoing impasse in Washington could trigger a fresh bout of stock-market volatility.
Top strategists' fears aren't yet backed up by the Street's so-called "fear gauge," the VIX Index, which has crept up nearly 4% over the past month but still trades well below the highs it spiked to shortly after Silicon Valley Bank collapsed in March.
But their warnings do echo the words of policymakers including Treasury Secretary Janet Yellen. She said earlier this month that there could be an unprecedented economic crisis with the US potentially just weeks away from the "X-date," the day it runs out of cash.
Debt-ceiling deadlock
The debt ceiling is a limit on how much the government can borrow, set by Congress.
The US hit its $31.4 trillion ceiling on January 19 – but the Biden administration and the Republican-led House of Representatives can't agree on how to resolve the brewing crisis.
Republicans are refusing to vote to lift the debt ceiling unless the White House agrees to future spending cuts. President Joe Biden and Democrats in the Senate believe that issue should be put to a separate vote.
Eleventh-hour talks between the two sides have yet to yield much agreement – and according to Yellen, the government will run out of money on June 1 unless they agree to raise the borrowing limit.
Wall Street worries
In recent days, the biggest names on Wall Street have joined Yellen, Nobel laureate Paul Krugman, and others to warn that the standoff could fuel a rapid rise in uncertainty for both the economy and stocks.
Volatility gauges for US Treasury bonds have jumped on the possibility that the US may fail to repay its debts. Stocks could follow suit if the standoff in Washington carries on, according to BlackRock.
Top strategists said Monday that only top-performing names like Meta Platforms and Nvidia had prevented S&P 500 volatility from spiking, with fears about the borrowing limit rocking other sectors.
"Brace for higher volatility because of the combined effect of debt ceiling concerns and financial cracks from rate hikes," BlackRock Investment Institute head Jean Boivin said in a research note seen by Insider.
Those views were echoed by Morgan Stanley's Mike Wilson, who warned Monday that "volatility is likely to accelerate near-term" if Congress can't resolve the debt ceiling before the X-date.
And even the usually cheerful Marko Kolanovic, who was one of the Street's biggest bulls through much of last year's sell-off, has started to fret about the standoff in Washington.
"It would be difficult to avoid at least a modest selloff in risk assets if the debt ceiling issue goes down to the wire as in August 2011," JPMorgan's chief market strategist said in a note to clients Monday, referring to Congress' last major debt-ceiling deadlock.