US: A default and subsequent Fed intervention would undermine the USD, Gold to gain market favor – UBS

We are just weeks away from hitting the limit for US government borrowing, and a compromise in Congress has yet to be reached. Economists at UBS analyze the market impact in the event of no agreement.

What happens if the US debt ceiling is not raised? 

“In terms of the market impact, we estimate the S&P 500 could fall quickly by more than 10% in this scenario as markets reprice the growth outlook and heightened systemic risks, though it could recover a meaningful portion of this oss if market turmoil pressures Congress into reaching agreement.”

“We think longer-dated Treasury bonds could sell off initially in response to any default, but we would also then expect them to rally back as markets price a heightened probability of recession.”

“A default and subsequent Fed intervention would likely undermine the value of the US Dollar, and we would expect Gold to gain market favor, as it has in previous debt ceiling stalemates.”