Stocks up as the rhetoric increases on Capitol Hill, Yen the big winner!

October 8, 2013

Not a great night in the US to kick things off with more red ink as the rhetorical argument between either side of US politics hots up increasing the chances of a US default or at least no resolution to the current impasse.

So in teh end the sell off accelerated into the close with the Dow down 137 points for a loss of 0.91%, the Nasdaq off 0.99% and the S&P falling 15 points to 1676 for a loss of 0.75%. Six more points and the S&P breaks its latest uptrend. Europe didn’t feel the pressure as much as the US, nor the lead from Asia, which saw the Nikkei down 1.22%. At the close, the FTSE was 0.26% lower, the DAX fell 0.36% the CAC was largely unchanged and just in the black. Milanese stocks rose 0.67% and Spanish stocks fell 0.41%. Look for Europe to lose some ground at the open this afternoon.

Closer to home, the SPI 200 futures on the ASX lost 13 points overnight.

On Forex markets, the Aussie dollar rallied back to 0.9427 this morning after falling back to 0.9387 last night. Euro is at 1.3573, GBP 1.6087 and the Yen continues to rally with USDJPY falling to 96.87 and will come under further pressure as traders take the Yen as a safe haven from US dysfunction. The Nikkei will suffer as a result.

Data-wise today, we see ANZ job ads and the NAB’s Business Survey, the latter of which is a huge release for the economy and we will see if it supports the recent recovery in the AiG indices. In China, the HSBC services PMI is released and then tonight the German trade data is out as well as French trade. And of course, we will continue to watch the heat rise on Capitol Hill in the US – potentially the biggest market mover for the next week.

The Rhetorical clap trap that is threatening the Markets

US politics has become completely dysfunctional with news from a spokes man for Democratic Senate Leader Hrry Ried last night, via a spokesman, that Republican Leader John Boehner has backed right away from agreements he has made in favour of the more radical position of maverick Texan Senator ted Cruz. The spokesman for Reid said,

From refusing to let the House vote on a bill that was his idea in the first place, to decrying health-care subsidies for members of Congress and staff that he worked for months to preserve, to stating that the House doesn’t have the votes to pass a clean CR at current spending levels, there is now a consistent pattern of Speaker Boehner saying things that fly in the face of the facts or stand at odds with his past actions. “Americans across the country are suffering because Speaker Boehner refuses to come to grips with reality. Today, Speaker Boehner should stop the games and let the House vote on the Senate’s clean CR so that the entire federal government can re-open within 20-four hours.

Those are fighting words and it is hard to see where the compromise is going to come from. What this means for traders is that we are all at risk of a big market break down. First in equities and then from markets more broadly if the US lawmakers don’t lift their game and get a move on and come to some agreement to both fund Obamacare and raise the debt ceiling. If not then we are going to have a potential financial disaster on our hands because it is my sense that a default or no agreement by the 11th hour is not priced in to markets. Not trust that some compromise will come to the rescue because just like Hank Paulson’s original TARP bill which was voted down the expected can happen in the broken and dysfunctional world of US politics.

S&P close to a break down

Extending that out to the technical outlook for the S&P as the global bell weather for stocks, the current market environment and ultimately sentiment it is worth noting that the S&P is only 6 points away from a breakdown through the current uptrend line.

As you can see in the chart from Vantage Webtrader the market is very close to a break down and the target is a fall of around 50 more points on the S&P.

Impact on other markets. 

Gilts, Bunds and the Yen are likely to be big beneficiary if US lawmakers don’t get themselves sorted out.

I’m not sure about the Aussie against the US but it should lose ground against the Yen, Euro and GBP but as Jutin Wolfers said on the 7.30 report last night the odds of a default by a country like Australia are much lower than one for the US these days. But as a global risk and punting proxy probably safer to be wary of the AUDUSD outright.

Australian Bonds will rally but the SPI 200 and ASX more broadly will come under pressure.

Have a great day, good hunting but be careful – it’s time to don the tin hats once again.

Greg

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