Default could be worse than the 08 crisis, USA unemployment claims fall, IMF warns over shutdown as does one of the biggest hedge funds…
Shares in New York fell sharply on Thursday afternoon after the US Treasury warned that the budget impasse between the Republicans and Democrats in Washington risked plunging the world’s biggest economy into its worst slump since the Great Depression;
“A default would be unprecedented and has the potential to be catastrophic. Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”
Mohammed El-Erian of bond investor giant Pimco also joined the chorus urging Congress to refrain from a debt ceiling stand-off.
“No one in their right mind would even consider playing Russian roulette with the full faith and credit of the government of the most powerful economy in the world. Let’s hope rationality returns to the extreme factions of the Republican party. The alternative is really far too awful to contemplate.”
The ISM non manufacturing index was printed in the USA on Thursday.
Economic activity in the non-manufacturing sector grew in September for the 45th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business. The NMI registered 54.4 percent in September, 4.2 percentage points lower than August’s reading of 58.6 percent. This indicates continued growth at a slower rate in the non-manufacturing sector.
Christine Lagarde, the IMF’s managing director, urged America’s politicians to settle their differences before the dispute harmed the entire global economy.
“I have said many times before that the US needs to “slow down and hurry up” – by that I mean less fiscal adjustment today and more tomorrow. In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.”
“In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy. So it is ‘mission-critical’ that this be resolved as soon as possible.”
US initial jobless claims rise slightly
The weekly US jobless claims data showed a small rise in the number of people signing on for unemployment benefit last week. The initial jobless claims total rose by 1,000 last week to 308,000. That’s close to the recent six-year low, and better than economists expected. The four-week average fell, to 305,000 – which is the lowest since May 2007.
Market overview
The DJIA inched closer to the critical psyche level of 15,000 to then finally drop below to close at 14,996 down 0.90% on the day on Thursday. The SPX followed suit to also close down by 0.90%. The NASDAQ closed down 1.07% European markets closed mainly down over the two Thursday trading sessions. The STOXX index closed down 0.55%, the FTSE closed up 0.18%, CAC down 0.73%, DAX down 0.37%. The Athens exchange broke the mould by closing up a stunning 2.3%.
Commodities suffered due to the continued USA govt. shutdown and impasse at the heart of government. ICE WTI oil closed down 1.12% at $102.93 per barrel, NYMEX natural closed down 1.21% at $3.50 per therm. COMEX gold finished the day down 0.23% at $1317.60 per ounce with silver on COMEX down 0.51% at $21.79 per ounce.
Equity index futures are (at the time of writing) down sharply suggesting that the equity markets on Friday will continue to suffer negative sentiment as a consequence of the USA govt. shutdown. The DJIA equity index future is down 0.79%, the SPX down 0.80% and the NASDAQ equity index future is down 1.09%.
Many of the European equity index futures are also leaning towards a negative open; STOXX down 0.55%, CAC down 0.71% and the DAX down 0.41%.
The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 2.61 percent at 5 p.m. in New York. It touched 2.58 percent, the lowest level since Aug 12th, after rising earlier to 2.65 percent. The price of the 2.5 percent debt due in August 2023 rose 3/32, or 94 cents per $1,000 face amount, to 99 3/32
Forex focus
The dollar depreciated by 0.3 percent to $1.3619 per euro late in the New York session, reaching the weakest level since Feb 4th. The U.S. currency fell 0.1 percent to 97.27 yen. Japan’s currency lost 0.2 percent to 132.46 per euro. The dollar slid to the weakest level in eight months versus the euro as the U.S. government’s partial shutdown added to concern economic growth will slow and prompt the Federal Reserve to delay reducing monetary stimulus.
The U.S. Dollar Index, tracking the performance of the greenback versus 10 leading global currencies, fell 0.1 percent to 1,007.87 after reaching the lowest level since Sept. 19th.
Sterling dropped by 0.4 percent to $1.6164 at the close in London after rising to $1.6260 on Oct 1st, the highest level since Jan 2nd. The U.K. currency weakened 0.7 percent to 84.31 pence per euro, the biggest decline since Sept 19th. Sterling has strengthened by 6.9 percent during the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg’s Correlation-Weighted Indices. The euro has risen 6 percent and the dollar has fallen 0.7 percent. The pound fell for the first time in five days versus the dollar amid speculation that a rally pushing it to a nine-month high this week was excessive.
Fundamental policy decisions and high impact news events for October 4th
Due to the govt. shutdown there will be no NFP number printed by the BLS on Friday. There are however other high impact news events that could affect sentiment. In the overnight Asian session the BOJ will conduct a press conference regarding its monetary easing measure and the forward guidance regarding rate setting.
Two FOMC members hold court in the afternoon session, once again, despite the turmoil in govt. due to the shutdown, investors will be looking for clues with regards to potential tapering of the Fed’s $85 billion per month asset purchase scheme.
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