The trading day on Tuesday began with investors fearing the worst due to the USA partial government shutdown, however, once the New York open began to approach it had become obvious, through European markets early performance and the USA equity future index futures, that investors fears were overdone…
Analysts at IHS have calculated that at least $300m will be removed off USA economic output per day, as government employees forced into unpaid leave by the shutdown rein in their spending. That rate will accelerate quickly if the shutdown continues for several days. A week long shutdown would knock ‘annualised’ US economic growth down to 2% in the final quarter of 2013, from 2.2%. But a three week shutdown, as seen in the Clinton era, could slash as much as 1.4% off annual growth.
The monthly Non-Farm Payroll, one of the most important high impact news announcements in the economic world, is due on Friday, but unless the shutdown ends swiftly the Bureau of Labor Statistics won’t have time to complete it. The unintended consequence is that it’ll make it difficult for the Federal Reserve to decide whether it should slow its bond-buying stimulus programme, in which it pumps $85bn into the US financial sector each month.
Fitch warns U.S. on debt rating
Whilst Standard & Poor’s issued statements yesterday suggesting that they’d take a ‘neutral’ stance on the USA sovereign credit ratings, Fitch have been more robust in their critique and warning;
[quote]“The US government shutdown is not in itself a downgrade trigger for the sovereign’s ‘AAA’/Negative rating. However, it undermines confidence in both the budgetary process and critically in the prospect of the debt ceiling being raised in a timely manner to avert the risk of default on US sovereign debt obligations, says Fitch Ratings in a reiteration of its June 28 rating commentary.[/quote]
[quote]“A formal review of the rating with potentially negative implications would be triggered if the US government has not raised the federal debt ceiling in a timely manner prior to when the Treasury will have exhausted extraordinary measures and cash reserves. According to official comments by the US Treasury secretary, extraordinary measures could be exhausted by 17 October.”[/quote]
US PMI signals slower manufacturing expansion
Markit Economics reported on Tuesday that the USA manufacturing PMI was down to a three-month low, signalling only a modest improvement of business conditions. New order growth slowed to five-month low. Employment rose marginally. The manufacturing expansion in the U.S. eased to a three-month low in September, according to the final Markit U.S. Manufacturing Purchasing Managers’ Index. At 52.8 down from 53.1 in August and in line with the flash estimate, the PMI indicated that manufacturing business conditions improved modestly over the month.
Italian markets rose by over three percent as Berlusconi’s allies desert him
Italian newspaper reports are suggesting that leaders of Silvio Berlusconi’s PDL party would support the current prime minister Enrico Letta in a confidence vote today. Italian deputy prime minister and PDL member Angelino Alfano said his party should vote in favour of Letta and there are no divisions in the party. PDL senator Carlo Govanardi said in a phone interview that his fellow party members will likely vote in favour of Letta.
Market overview
The DJIA closed up 0.41%, the SPX closed up 0.80% and the NASDAQ closed up a significant 1.23% on Tuesday. European equities rallied, with the exception of the UK FTSE which closed down marginally by 0.03%. The CAC closed up 1.28%, DAX up 1.10%, Athens exchange closed up 0.76%, with the MIB closing up the most on the day due to a reconciliation within the Italian government.
Commodities fared badly on Tuesday, despite positive reading from the equities indices in the USA and Europe. ICE WTI oil finished the day 0.58% down at $101.74 per barrel, NYMEX natural finished the trading day up 1.21% at $3.60 per therm. COMEX gold fell substantially by 3.08% to close below the significant $1300 psyche level at $1287.45 per ounce. Silver on COMEX also fell sharply down by 2.50% at $21.26 per ounce.
Equity index futures are positive at the time of writing suggesting that both European and USA markets will open in positive territory. The DJIA equity index future is up 0.49%, the SPX up 0.90%, with NASDAQ up 1.14%. The European STOXX equity index future is up 1.32% with many of the leading euro indices futures also up.
Forex focus
The U.S. Dollar Index tracking the performance of a basket of 10 leading global currencies versus the dollar, dropped 0.1 percent to 1,011.10 late in the New York session, after losing circa 2.8 percent during the last quarter, the most since 2010.
The euro touched its highest level versus the greenback in eight months as the political wrangling in Congress threatens U.S. growth. The U.S. currency was little changed at $1.3526 per euro after depreciating to $1.3588, the weakest level since Feb 6th. The yen gained 0.3 percent to 98 per dollar and climbed 0.3 percent to 132.55 per euro. The dollar traded at almost the lowest since February as a partial shutdown of the U.S government boosted speculation the Federal Reserve will now have no alternative but to persevere with its asset purchases therefore weakening the USD currency.
The Australian dollar rose after the central bank left interest rates unchanged stating that earlier cuts are still filtering through the economy and boosting asset prices. The Aussie jumped 0.9 percent to 93.98 U.S. cents, after reaching the biggest one-day advance on a closing basis since Sept 18th.
The loonie weakened by 1 percent to 97.02 cents per Australian dollar in Toronto. Canada’s currency depreciated 0.1 percent to C$1.0322 per U.S. dollar. One Canadian dollar buys 96.88 U.S. cents.
Sterling rose by 0.2 percent to $1.6215 late in the London session after rising to $1.6260, the highest level seen since Jan 2nd. The U.K. currency ended last year at $1.6255 and then fell as much as 8.9 percent to its 2012 low of $1.4814 on July 9th. Sterling appreciated 0.1 percent on Tuesday to 83.52 pence per euro after climbing to 83.33 pence, the strongest since Jan. 17.
Fundamental policy decisions and high impact news events for October 2nd that may affect market sentiment.
Spanish unemployment is expected to rise by 12.3K, UK construction PMI is expected to rise to 60.1. The ECB decision on the European bank base rate is predicted to remain static at 0.5%. The USA ADP employment numbers are predicted to reveal that the USA added 177K jobs in September. The ECB will hold a press conference discussing their rate change decision and any forward guidance policy.
Perhaps the key issue of the day is the press conference to be held by Fed chairman Ben Bernanke, many investors will be (once again) looking for clues as the the beginning of tapering of the asset purchase/monetary easing programmes.
