The IMF finally added its voice to the opinions of; APEC, Chinese officials, Japanese officials, Goldman Sachs, the USA Treasury chief, and other assorted bank chiefs and analysts regarding the debt ceiling. There was one other voice who added his opinion later in the day on Tuesday; in the gravest of tones president Obama made a speech from the Whitehouse which subsequently saw a late sell off in the USA main indices indicating that the markets were left doubting the impasse will be broken. The president said that not raising the debt ceiling would be “horrible”;
[quote]”America would not be able to meet all our financial obligations for the first time in 225 years. Military pay, veterans’ benefits and social security would be cut. The last time that the Tea Party Republicans flirted with the idea of default two years ago, markets plunged, confidence plunged and the country’s credit rating was downgraded, some House Republicans are arguing that a default would be OK. But an actual decision to default would be, according to CEOs, and I’m quoting here, “insane,” “catastrophic,” chaos – Warren Buffett likened a default to “a nuclear bomb, a weapon too horrible to use”. Raising the debt ceiling is a lousy name which is why members of Congress of both parties don’t like to vote for it, because it makes you vulnerable in political campaigns.” [/quote]
IMF lowers global growth targets
The IMF now expects the global economy to expand by 2.9% in 2013 and 3.6% in 2014, down by 0.3 and 0.2 points respectively on its last predictions, made in July, despite signs of recovery in the euro area. There was a giddy sense of optimism from UK based journalists given that the IMF suggested that the UK economic GDP will now rise by 1.4% in 2013 versus the 1.3% the UK’s ONS has recently published. However, that giddy sense of optimism should be tempered by the realization that the IMF predicts growth in the Eurozone, the UK’s biggest trading partner, to be negative -0.3% and -0.5% in 2013 and 2014. Quite how the UK will expand with its largest trading partner shrinking is anyone guess, presumably the UK will do what it does best; its population returning to selling houses to one another at increasingly out of touch prices and sucking in cheap imports from overseas. The wrong type of growth illustrated by business investment collapsing according to the latest figures and the IMF warning that the UK should engage in more infrastructure projects.
Olivier Blanchard, the IMF’s economic counsellor, said;
[quote]”The US economy remains at the centre of events. Private demand continues to be strong, although growth has been hobbled this year by excessive fiscal consolidation. Politics is creating uncertainty about both the nature and the strength of the fiscal adjustment. The sequester is a bad way to consolidate, and conflicts around increasing the debt ceiling could lead to another bout of destabilising uncertainty and lower growth. While there are no major conceptual or technical issues involved, the communication problems facing the Federal Reserve are new and delicate. It is reasonable to expect some volatility in long rates as Fed policy shifts. The obvious question is whether this slowdown reflects cyclical factors or a decrease in potential output growth. Based on what we know today, the answer is that it reflects both, albeit to different degrees in various countries – more cyclical in Russia and South Africa, more decreased potential in China and India. But in the background, other legacies of the crisis still linger, and may well come back to the fore. Public debt and, in some cases, private debt remain very high, and fiscal sustainability is not a given. The architecture of the financial system is evolving, and its future shape is still unclear.”[/quote]
In other news the Swiss economy published some decent numbers on Tuesday;
Retail sales increased by 2.3%, the unemployment rate remained steady at 3.2%, whilst inflation came in at 0.3%. The German trade balance came in at a healthy €15.6 bn (in favour of exports naturally) although German factory orders unexpectedly fell by -0.3%.
Canada’s trade balance came in worse than anticipated at -$1.3 bn, with housing starts up to 184K.
Market overview
Obama’s late statement spooked the USA indices, at the start of his speech the DJIA was hovering around a 0.7% loss on the day, by the time he’s finished and the markets had closed the DJIA was down 1.07%, the SPX closed down 1.23% and the NASDAQ down a precise 2.00% on the day.
Having begun the day down moderately many European bourses suffered in their afternoon sessions once USA markets opened. STOXX index closed down 0.67%, FTSE down 1.11%, CAC down 0.77%, DAX down 0.42%, with the Athens exchange breaking the mould and closing up 1.46%.
Commodities experienced mixed fortunes, ICE WTI oil closed up 0.50% at $103.55 per barrel, NYMEX natural closed up 2.40% at $3.72 per therm. COMEX gold closed down 0.04% on the day at $1324.60 per ounce, with silver on COMEX up 0.25% at $22.44 per ounce.
Equity index futures are, at the time of writing, pointing to another negative day on both the European and USA markets. The DJIA equity index future is down 0.92%, SPX down 1.06%, NASDAQ down 1.69%. UK FTSE equity index future is down 0.91%, CAC down 0.73% and the DAX equity index future is down 0.24%
Forex focus
The dollar increased 0.2 percent to 96.88 yen late in New York after gaining as much as 0.6 percent earlier. The greenback was little changed at $1.3573 per euro after rising 0.2 percent earlier. The 17-nation shared common currency appreciated by 0.1 percent to 131.49 yen. The dollar rose versus 13 of its 16 most-traded peers as the U.S. political stalemate persisted and President Barack Obama warned the nation faces a “very deep recession” if Congress doesn’t raise the debt limit, fueling safe haven demand for the dollar.
The Swiss currency cut a decline versus the euro after SNB President Thomas Jordan said the central bank hasn’t had to intervene in currency markets to protect its franc ceiling for more than a year. The franc fell as much as 0.3 percent to 1.2295 per euro before trading at 1.2269. It gained 0.3 percent on Tuesday.
The loonie declined by 0.5 percent to C$1.0368 per U.S. dollar late in Toronto, reaching the weakest level seen since Sept. 10th. One Canadian dollar buys 96.45 U.S. cents. Canada’s dollar fell to a four-week low versus its U.S. counterpart as a government shutdown in its largest trading partner continued and the nation’s trade deficit unexpectedly widened in August as imports rose to a record high. The currency was weaker versus all of its 16 major peers even as a report showed the nation’s housing starts last month exceeded forecasts.
High impact news events that may affect market sentiment on October 9th
The UK’s ONS publishes its manufacturing data on Wednesday morning expected to come in at 0.3%. Industrial production is also published as is the UK’s trade balance expected to come in at -£8.9 bn. German industrial production is predicted to come in at 1.1%. From the USA we receive the latest FOMC meeting minutes, whilst ECB president Mario Draghi will hold a press conference.
