JP Morgan Warns Of Major Market Crash If Debt Talks Go Wrong

President Joe Biden and top Republican Kevin McCarthy are set to restart discussions on the debt ceiling deal as the possibility of a United States default becomes increasingly imminent. This alarming situation poses a significant threat to global financial markets, but so far, the US stock market and the broader crypto sector have remained relatively unaffected. However, a new analysis from JPMorgan warns that the lack of market movement could indicate a potential surge in volatility as the default deadline approaches.

Financial Markets Remain Volatile

In a note to clients on Monday, JPMorgan’s equity macro strategy team expressed concerns that equities may be slow to factor in the risks of a contested debt-ceiling rise and the growing probabilities of a technical default. As the US gets closer to the deadline, these risks could sharply re-price, leading to broader market turbulence.

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Bank of America Research, on the other hand, highlights that debt ceiling concerns typically impact stocks when the X-date, the day the US is expected to default on its obligations, is within two weeks. Moreover, Goldman Sachs projects that the Treasury’s cash balance can fall below $30 billion by June 8-9, a threshold historically used to project the deadline. While speaking about the development, Goldman Sachs’ economic research team was quoted as saying:

We also expect a few more twists along the way, and suspect that markets are likely to price in additional risk before the debt limit is finally raised.

Growing Concerns Over US Debt

The US stock market did fall when preliminary talks between the two parties — President Biden and Speaker of the House Kevin McCarthy — broke off on Friday in Biden’s absence. However, overall the declines have been contained as the S&P continues to trade within the range it has been in for the past six months, which is roughly around 3,800-4,200.

The crypto market has also remained resilient with Bitcoin’s price flirting around the $26-27k range and Ethereum mostly trading close to the $1800 price mark. But, as highlighted by JP Morgan’s latest analysis, a major collapse in the US stock market might have a large ripple effect on the cryptocurrency market as well, which could result in Bitcoin breaking past its support level of $25,000 and hitting a new monthly low.

In response to the urgency of the situation, President Biden and McCarthy are scheduled to meet at 5:30 P.M. EST (21:30 GMT) on Monday, May 22. This meeting follows a phone call between the two leaders on Sunday, emphasizing the need for prompt decision-making regarding the debt ceiling issue. The outcome of these negotiations will determine the course of action to avert a potential default and the subsequent effect on the global financial landscape.

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