Morgan Stanley's Michael Wilson — among the most bearish voices on Wall Street — expects the debate around raising the U.S. government's $31.4 trillion borrowing limit to trigger some sharp swings in equity markets.
Most clients "believe it will ultimately get resolved, but not without some near-term volatility," Wilson wrote in a note, adding that many have framed the event as "a lose-lose for markets."
The strategist, who correctly called the slump in U.S. stocks in 2022, said even if the debt ceiling was lifted by the so-called X-date — the day when the Treasury's cash runs out — it could potentially squeeze liquidity and lead the S&P 500 lower, "given the index's sensitivity to changes in liquidity in recent history."
President Joe Biden and House Speaker Kevin McCarthy have been locked in a standoff for months over the budget negotiations and plan to meet Tuesday to discuss the matter.
A U.S. default risks triggering a market selloff, a spike in borrowing costs and a blow to the global economy that could rival the 2008 crash.
