US Close: Stocks sink on rising rates and risks, Debt drama, Dollar down but still king,

US stocks are lower as fiscal policy remains up in the air, high energy costs are now a given, no one can answer how long peak supply chain constraint problems will last, global growth concerns for the upcoming quarter continue to worsen, all while the what was the never-ending safety net of central bank stimulus seems poised to end soon.  Last week, Wall Street finally saw the S&P 500 index give back 5% in an intra-day move and now everyone wants to find out if we will see a 10% drop from record high territory before the bulls roar back.  The Nasdaq is the punching bag as global bond yields rise and as many investors anticipate the cyclical rotation trade will become the playbook after the DC debt drama.

The outlook has many risks and growth will decrease slightly, but stagflation is not one of them.  As long as demand remains strong from the consumer and business, perma-bulls should not lose sleep over the next year.  

Debt

President Biden’s comments over the debt ceiling was a reminder of how far apart Democrats and Republicans are over increasing the country’s borrowing limit.   Congress will undoubtedly bring the US to the brink of failing its debt for the first time ever, before some agreement is reached.  Dragging the debt ceiling as close to the October 18th deadline will undoubtedly unnerve some investors.  

DC looks like it is poised for a couple more weeks of posturing before Democrats trim the $3.5 trillion spending bill.  Risk appetite is struggling as the blue wave’s last major initiative will likely be chopped down to something closer to $2 trillion and while markets widely anticipate a Fed taper announcement on November 3rd.  

FX

The dollar is lower across the board, but undoubtedly still king.  The dollar still looks bullish over the short-term as risks to the outlook from Evergrande and tensions between Xi/Biden will drive safe-haven flows, while inflationary pressures will keep the Treasury curve steepener trade going.  If EUR/USD has 1.1550 breached, momentum selling could peak around the 1.14 level.  

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