Markets Remain Sanguine Ahead Of Debt Showdown

As we open up on the 7th day of the US government shutdown, we are still dealing with markets that have yet to really start worrying about the upcoming debt ceiling fight. Maybe this is as a result of people being sure that the US Congress could not be so stupid as to bring a default down on the US’s head, entirely of its own doing, could they? Be that as it may, we are still positive around this situation – what else is there – although we still believe that a joint bill of a debt ceiling increase and a budgetary continuing resolution will not be passed until close to the October 17th deadline.

As far as market volatility is concerned, we believe that the basketball analogy that we have used in the past is once again relevant. Basketballs are, in the majority, the back and forth of one team to the other at a seemingly regular speed. The last 2 minutes of the game however, are frantic and frenetic and exciting as it gets. We are not in that 2 minute window for market volatility yet and won’t be for another week I would say.

Language from policymakers will be key and should suggestions from John Boehner, Speaker of the House, or Harry Reid, Senate Majority Leader, show a hardening of positions in the coming days, then we will start to see the typical haven investments very much en vogue.

The European single currency remains strong at the moment, mainly as a function of the EUR/USD and recent USD weakness, something we believe will be coming to an end soon. News from Italy only got worse for Silvio Berlusconi as a senate committee voted to recommend that the former Premier is banished from his position in the Italian upper house. A full vote on the prospect is due later this month.

Asian markets are slightly lower this morning after the World Bank cut its growth forecasts for China through 2013 and 2014 on the basis of a rebalancing of the economy away from export-led industry and more towards domestic consumption. This should also see falls for the rest of South East Asia as natural trade flows decrease as well. The bank now expects developing East Asia to expand by 7.1 percent this year and by 7.2 percent in 2014, down from its April estimate of 7.8 percent and 7.6 percent, respectively.

In the absence of a resolution in Washington and a lack of economic needle-movers today, you would expect today to be a quieter day. Event risk increases later in the week with the Bank of England meeting (Thursday), US retail sales (Friday) and hopefully last week’s jobs numbers, delayed by the closure of the Bureau of Labor Statistics.