US Debt and Equity Markets




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(Pertinent and general disclosures attached.) 

 Yesterday, the U.S. was able to avoid defaulting on their debt obligations. But what did they really agree to?


Here are some key highlights from yesterday’s legislation, as outlined by the Congressional Budget Office:

  • Initially increase the nation’s debt limit by $400 billion, making provisions for further increases in two additional steps for a total of $2.1 to $2.4 trillion. This legislation will raise the current $14.3 trillion debt ceiling by at least $2.1 trillion.
  • Reduce budget deficits by $917 billion over the next 10 years through caps on discretionary programs, program integrity initiatives, education proposals and debt service savings.
  • Create a Congressional Joint Select Committee on Deficit Reduction to work out further deficit reductions with a goal of at least $1.5 trillion in additional budgetary savings over the next 10 years.
  • Establish automatic procedures for reducing spending by as much as $1.2 trillion, should legislation from the new joint select committee fail to achieve such savings.

While these measures helped the U.S. government to stave off default, it did little to calm equity investors yesterday as major equity indices around the world sold off substantially. Although a default has been avoided, commentary from ratings agencies would suggest that the country’s AAA credit rating may still be at risk. Last night, Moody’s and Finch reaffirmed the U.S.’s AAA rating. However, the outlook from all three major rating agencies remains negative, and Standard and Poor’s Rating Services has indicated that the $2 trillion of cuts falls short of the $4 trillion figure that S&P believes would be required to maintain a AAA rating.

In spite of the negative tone that exists in the market, DundeeWealth Chief Economist Dr. Martin Murenbeeld remains bullish of equities, as his models suggest that Canadian equity markets remain fairly valued, while U.S. equities may be undervalued. Murenbeeld’s models also show 10-year government bonds in both the U.S. and Canada to be overvalued.

Dr. Murenbeeld’s views are consistent with strategists at Scotia Capital who favour equities over bonds, and cyclical over defensive stocks for the back-half of 2011. Scotia Capital strategists Vincent Delisle and Hugo Ste-Marie believe that the “risk on” trade is currently at its most attractive levels since last summer and would view the recent pullback as an opportunity to rebalance portfolios towards equities and gradually raise cyclical exposure.




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