“My personal observation about the deficit discussions of 2011 is that risk markets (stocks, corporate bonds, commodities, etc.) are deeply worried that Washington needs another capital markets crisis to deliver real answers,” Colas wrote in a note Monday.
The Federal Reserve seems worried by anti-Fed rhetoric from the Republican party, he added.
“This contributed to the FOMC’s decision to skip a full-blown QE3 and will likely keep them on the sidelines until markets are howling for further assistance,” Colas said. “The famous ‘Bernanke Put’ is deeply out-of-the-money, as an options trader would put it.”
Still, Washington appears so gridlocked that a supercommittee compromise would boost markets. “That would be a powerful catalyst for stocks in November, even if capital markets are giving this outcome slim odds just now,” he wrote.