On Tuesday market investors appeared to brush off the partial shut down of the USA government; equities rallied in Europe and the USA, whilst the Nikkei and the ASX 200 rose. However, Wednesday was an entirely different scenario; the USA markets fell sharply shortly after the market opened to recover some losses towards the end of the session. Perhaps it was the reality finally hitting investors that this impasse might in fact last long enough to cause irreparable short term damage to USA GDP, if not resolved before October 17th, the date at which the USA treasury department has predicted as the day the USA may begin to default on its obligations.
In anticipation of a potential ‘full’ shutdown 15 leading bankers visited president Obama at the Whitehouse presumably to discuss several “what if?” scenarios with the POTUS. Lloyd Blankfien, the CEO of Goldman Sachs, stated that bankers;
[quote]“Are in a position to really know early what the consequences are. They (congress) shouldn’t use the threat of causing the U.S. to fail on its obligation to repay debt as a cudgel.”[/quote]
Mario Draghi outlines ECB guidance moving forward
Draghi spoke in Paris after the ECB’s Governing Council left its main refinancing rate at a record low of 0.5 percent. The decision was predicted by the majority of economists polled. Draghi stated;
[quote]“Real GDP growth in the second quarter was positive, after six quarters of negative output growth, and confidence indicators up to September confirm the expected gradual improvement in economic activity from low levels. The overall improvements in financial markets seen since last summer appear to be gradually working their way through to the real economy.”[/quote]
ADP job numbers disappoint, as does their August revision
It doesn’t seem too long ago that the private hire payroll firm ADP were extolling the virtues of their new methodology. We were reliably informed, through their press release, that their shiny new model would be far more accurate and finally extinguish the faults that made the ADP numbers a bit of a joke in the investment community. It’s only taken less than a year for their product to fall apart. Despite expectations of a figure of circa 180K jobs created in the month of September, the actual print came in below expectations at 166K, but that wasn’t the real issue with this latest print, it was the retrospective revision that raised eyebrows once again raising the spectre that the ADP jobs print should be largely ignored. ADP revised their previous month from 175K to 159K.
On the subject of job numbers it’ll be fascinating to witness the data print from the BLS today in the NY session regarding continuous unemployment claims. Analysts are predicting 315K, however, we need to know if firstly the figure will be affected by the shut down and secondly whether or not California and Nevada are back on line with their data.
Market overview
The DJIA recovered a lot of its earlier lost ground to close down 0.39% on the day. The SPX and NASDAQ closed down marginally by 0.07%, with the markets encouraged by the efforts and ‘olive branches’ Obama keeps dangling in front of Congress.
European markets had begun to close before the recovery from the USA lows took shape. The STOXX index had closed down 0.50%, FTSE down 0.35%, CAC down 0.92%, and the DAX down 0.19%. The MIB closed up 0.68% as a resolution in the form of a vote of confidence in the current Italian coalition proved positive.
Commodities enjoyed a strong day, ICE WTI oil up 1.79% on the day at $103.87 per barrel, NYMEX natural down 1.87% on the day. COMEX gold recovered some of yesterday’s significant losses ending up 2.39% on the day, with silver on COMEX up 2.81% at $21.77 per ounce.
Despite the return of some market optimism the DJIA equity index future is down 0.65%, the SPX down 0.41%, and the NASDAQ down 0.21%. Many of the European indices are also projecting a negative open on Thursday; CAC down 0.62%, DAX down 0.55%.
Forex focus
The euro advanced 0.4 percent to $1.3586 late in the New York session, reaching the biggest one-day gain since Sept 18th. The 17 nation shared single currency was 0.2 percent weaker at 132.28 yen after falling as much as 0.9 percent. The yen strengthened 0.6 percent to 97.39 per dollar. The euro strengthened the most in two weeks versus the dollar after European Central Bank President Mario Draghi refrained from signaling that additional measures were needed to boost the region’s recovery.
The euro has strengthened 5.8 percent this year, the best performer amongst the 10 developed-nation currencies tracked by Bloomberg’s Correlation-Weighted Indices. The dollar has appreciated 2.4 percent, while the yen has slumped 10.1 percent.
The loonie depreciated 0.2 percent to C$1.0337 per U.S. dollar late in Toronto. It touched C$1.0356, the weakest level seen since Sept 16th. One Canadian dollar buys 96.74 U.S. cents. Canada’s benchmark 10-year government bond rose, pushing the yield down two basis points to 2.54 percent. The price of the 1.5 percent security due in June 2023 rose 13 cents to C$91.13. Canada’s dollar fell versus the majority of its 16 most-traded counterparts as the U.S. government shutdown persisted, risking economic growth in the nation’s biggest trading partner.
Sterling advanced by 0.2 percent to $1.6229 late in the London session after touching $1.6260 yesterday, the highest level seen since Jan 2nd. Sterling fell 0.3 percent to 83.79 pence per euro after reaching 83.33 pence yesterday, the strongest level since Jan 17th. It dropped versus the euro after European Central Bank President Mario Draghi said the 17-nation currency’s exchange rate is not a policy target.
The pound approached its strongest level since January versus the dollar as an industry report form Markit Economics showed UK construction expanded for a fifth month in September, adding to evidence that the U.K. economy is expanding.
Bonds
Treasuries gained, pushing 10-year note yields to almost a seven-week low, after a report by ADP Research Institute showed companies in the U.S. hired fewer workers than forecast in September, yields decreased three basis points, or 0.03 percentage point, to 2.62 percent at 5 p.m. New York time. The price of the 2.5 percent debt due in August 2023 rose 9/32, or $2.81 per $1,000 face amount, to 98 31/32. The yields dropped as much as six basis points, the biggest intraday decline since Sept 18th, to 2.5901 percent. They slumped on Sept. 30 to 2.5882 percent, the least since Aug 12th.
Fundamental policy decisions and high impact news events that could affect market sentiment on October 3rd.
There’s a German bank holiday on Thursday, but there’s plenty of other high impact news events scheduled on the day. Like many economies in Europe the UK relies on its services to propel growth. The UK services PMI, courtesy of Markit Economics, is published with the expectations of continued growth at 60.4. Unemployment claims are published for the USA, but they may be affected by the USA govt. shutdown and lack of data from several states. However, a print of 315K is expected. The USA ISM PMI is published, the expectation is for a drop to 57.2 from the previous month profit of 58.6.
