Markets don't like uncertainty, and right now we have plenty of it, not just in regards to contract performance, but also on a macro scale with the US and European debt crises. While the Europeans seem to have found a way to kick the can further down the road, US lawmakers are hopelessly deadlocked regarding the debt ceiling. Most traders believe that it is business as usual and that a last minute compromise will be found, which will defer the problem into the future. This is why the markets have stayed relatively calm, with treasury bonds showing no signs of even the slightest panic.
However, we feel that this is not your usual budget debate, since the "Tea Party" Republicans seem determined to stay their course, which could mean that at best we'll get an extension until early next year. This would probably unsettle the financial markets and could lead to unintended consequences. We believe that either way the repercussions are not going to be pleasant for the financial markets. If a deal is agreed on and the debt ceiling is raised, it means just more money printing and a further weakening of the currency. If no deal is reached or budget cuts are too deep, it would be akin to taking a patient off life support, which means that the Fed would have to step in rather quickly with a new stimulus program (= money printing) to prevent the US economy from going into a tailspin.
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