By David Kotok
The Senate Gang of Six has presented a plan to settle the American debt ceiling debate. The market reacted positively, with a rally in both stocks and bonds.
Released tonight, the polling results from the Wall St. Journal help explain the political shift that will now get this done. 38% of Americans say the debt ceiling should be raised; a month ago this was 28%. 31% say don’t raise it; a month ago this was 39%. 58% of the thousand people polled now support Obama’s approach.
Markets are assuming this Senate announcement will be the catalyst to bring a resolution to the very divisive federal politics we have been witnessing in the government of the United States. We agree.
We expect the market rally to carry to new recovery highs. This expectation assumes a debt ceiling resolution is completed before the August 2 deadline.
We also expect that the European leadership will find a construction by which they, too, will bring their high uncertainty to some settlement. That may come this week.
The euro-based markets and the dollar-based markets are the two largest capital markets of the world. We estimate their size by adding the total values of the stock markets and bond markets tied to those two currencies.
Our data sources are the Bank for International Settlements (BIS) and the World Federation of Stock Exchanges. We track their data as it is released.
The issues of sovereign-debt creditworthiness, budget austerity, and deficit financing have been hanging like a pall over these two largest global capital markets. It appears that the crisis in the euro zone and the dollar zone became sufficiently intense that political leadership in both zones are stepping up and concluding action. Those leaders are forced to do so by market vigilantes.
We believe that lifting these massive uncertainties from these two largest capital markets will act as a huge catalyst for the upward movement of financial assets. These events of political resolution are very bullish.
We remain fully invested.
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