With disaster in the eurozone once more postponed, if not vanquished, markets are again turning to the US in their never-ending search for trouble.
There's plenty to worry about, from the immediate threat of default if the political system feels suicidal enough to refuse to lift the US debt ceiling, to the imminent conclusion of QE2.
No one really knows what effect turning off the liquidity tap will have on demand. In theory, it should lead to a slight tightening of monetary conditions, with the dollar appreciating a little and bond yields up a bit.
But the read-through is by no means certain. It's a bit like weaning someone off a drug addiction. The patient may respond positively, but it could go the other way. Certainly the UK economy has struggled to show much growth since the QE stopped.
On the debt ceiling, we have to assume that as with the Greek austerity vote, the brinkmanship on Capitol Hill is no more than an elaborate game of bluff and that the limit will eventually be lifted. Even so, Republicans and Democrats alike seem determined to take things to the wire. For markets, trading opportunities abound around the consequent uncertainty.
Neither side wants to be seen as the one that pulled the plug on the economy by causing the US to default; the consequences of such an action right at the very heart of the world monetary system are too awful to contemplate, though admittedly one or two hotheads seem to think the ensuing mass liquidation wouldn't be too bad. These outliers can be safely ignored; default would be catastrophic. (read more)