Debt ceiling may be 'lose-lose' situation for stocks: Morgan Stanley

The bank's chief US equity strategist indicated Monday that he agreed with clients' view that the ongoing standoff is"a lose-lose event for markets", with stocks suffering due to either heightened volatility or a future slowdown in spending., volatility is likely to accelerate near-term," Wilson wrote in a research note, referring to the date the government runs out of cash.

"Conversely, if the debt ceiling is lifted before the x-date, it will likely come with some concessions on the spending front which is likely a headwind for growth down the line," he added.Republicans, who control the House of Representatives, have said that they won't vote to lift the $31.4 trillion ceiling hit by the US on January 19 unless the Biden administration agrees to future spending cuts.

But even in that scenario, the Republicans' proposed spending cuts would still be bad news for stocks because they'd fuel a future economic slowdown, Wilson said. The Treasury would also likely respond to a lifting of the borrowing limit by issuing more bonds to start raising money to repay its debts – and investors piling into those would mean they had less cash to spend buying stocks, he added.

"Such an outcome would also lead to significant, pent-up issuance from the Treasury to rebuild its general account and pay its bills," Wilson wrote."Our rates team thinks the issuance from Treasury would be significant in the six months following the debt ceiling being lifted."back to the downside given the index's sensitivity to changes in liquidity in recent history," he added.

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