'Fiscal cliff' is a dirty word once again

The fiscal cliff is rearing its ugly head once again as the Obama administration has warned that the current debt cap could be reached by mid-October, rather than the mid-November originally forecast.  The markets could be in for a bumpy road ahead, or the next couple of months at least, as we'll most likely watch the Democrats vs Republicans play chicken with the US economy once again!

If we looked back how the markets reacted in the run-up to the past votes both in 2011 & 2013 we might have an idea of how people might react in the run-up to the event, as well as looking at what happened straight afterwards.



August 2011

As you can see the equity markets (shown below) had a strong sell off a week or 2 before the actual event, and then took a couple of months of sideways trending market to stabilise after it.  It is also noted that US treasury yields dropped as money which was previously in 'risky' assets was reallocated to 'risk-free' assets after on the 5th August S&P downgraded the US for the first time ever, but Moody's & Fitch did not follow suit.

The FX markets were slightly different in their behaviour, they were rangebound / strengthened slightly before hand but then after the news had sunk in the USD rallied pretty hard against these currency pairings.

Jan 2013

When you compare the markets to 2011, there are some similarities and some differences in how the market behaved.   Unlike before, the equity markets barely had any pullback on the run up to it, I think people were lot more confident this time that the politicians wouldn't allow the situation.  Despite the US actually technically defaulting before the cap was increased once again, both indices show a strong bull trend over time period.

The FX markets behaved very similarly to 2011, with a sideways consolidation and then a strong USD afterwards, unlike in the Equities.  Also similar to 2011, the US was also downgraded by a credit ratings agency, this time by Fitch.

Charts sourced from ig.com