Obama's "No magic bullet" sends markets into a tailspin

And so it begins, it would appear that markets are starting to wake up to the fact that what is going on in Washington could well be pretty serious for the US and global economy.

Last night's comments by President Obama that "there is no magic bullet" to resolve the budget showdown saw the biggest one day slide in the US markets for 11 months.

Markets did stabilise on the news that Ben Bernanke's deputy Janet Yellen would be confirmed as his replacement as Fed chairman when he steps down in January.

This choice of monetary policy dove makes it much more likely that the Fed will continue to remain accommodative well into next year, though even she won't be able to apply a band aid if Congress continues along its self-destructive path.

Quite why it took the utterances of those five little words to reinforce what has been blindingly obvious for the last eight days seems beyond me, but the S&P500 dropped sharply to its lowest levels since early September.

In addition it can't help overall sentiment when you hear Republican Congressman coming out with financially illiterate comments that the price of US treasuries has no effect on Main Street.

This latest turn of events looks set to translate into yet another negative European open this morning as markets slowly start to become increasingly nervous about the unpredictability of the situation in the US.

One can only hope that more moderate Republican elements rein in their more conservative colleagues before even more damage is done to the US's international standing.

The hope now is that House speaker Boehner will eventually agree to hold a vote in the House and that more moderate elements in the party will pull the US back from the brink.

On any ordinary day the release of the latest FOMC minutes would merit significant market attention, particularly given the fact that the Fed wrong-footed the market in September.

Events of the last few weeks would appear to have effectively rendered them redundant now. The day after last month's Fed meeting St. Louis Fed President James Bullard told Bloomberg that the taper/no taper decision was finely balanced.

He would struggle to make that argument now which suggests that irrespective of what the minutes say, the prospect of tapering is likely to be put back to December at the earliest, and maybe into 2014.

We don't know the effects this shutdown will have on Q4 growth, with no unemployment numbers as yet for September, incomplete data likely for October, which means that the damage to the US economy is going to be very hard to gauge, which would suggest that it will be extremely difficult for the Fed to draw any conclusions as to when to end their tapering program.

While the standoff in the US continues last night's earnings from Alcoa garnered somewhat of a mixed response, even though they came in well ahead of expectations, despite low aluminium prices. Expectations had been lowered a while ago and given weak metals prices the improvement was largely driven by better cost control, and not higher turnover.

In the European trading session, the main focus of attention turns to the UK after the IMF's volte-face on the UK economy yesterday when they upgraded their forecasts for 2013 and 2014.

This about turn has seen the pound regain some of the lost ground of the last couple of days, but it could well be for nought if the latest manufacturing and industrial production data for August doesn't match the equivalent PMI data for the same month.

Expectations are for a monthly rise of 0.4% on both measures, while the UK August trade numbers are expected to narrow to -£8.85bn.

Today's latest Bank of England meeting is not expected to provide any surprises with no changes expected.

In contrast to the UK industrial production numbers, the latest data out of Germany showed some surprising weakness yesterday when factory orders slid back 0.3%, confounding expectations of a rise of 1.2%. It is highly likely that today's August industrial production figure could be similarly weak even though expectations are for a positive 1.1% rise.

EURUSD - stuck in a range for now with sellers towards the highs this year above 1.3650. We do need to be aware of the bearish daily candle on Friday which suggests we could get a move back lower towards the 1.3450/60 level. Only above the 1.3710 level would argue for a move towards the 1.4000 level. A break below the 1.3450/60 area which acted as support last week would signal a move towards the 1.3320/30 level.

GBPUSD - having failed to break below 1.6000 and more importantly the 1.5980 area we've seen a nice pullback above 1.6100. We still need to be aware of last week's bearish daily candle patterns which could limit the upside. There remains significant resistance through 1.6300 with trend line resistance at 1.6330 from the 2009 highs at 1.7045 as well as the highs this year at 1.6370 big chart points. The risk is that a sustained break below 1.5980 could suggest a move towards the lows two weeks ago at 1.5880 and the medium up trend support now comes in at 1.5865 from the 1.4815 lows.

EURGBP - the inability to break above down trend line resistance at 0.8470 from the 0.8760 highs keeps the onus on the downside and a retest of the 0.8400 area. The expectation is still to see a move towards 0.8280, but we need stay below the 0.8500 and the 200 day MA.

USDJPY - the US dollar continues to close in on the 200 day MA at 96.70 having broken below trend line support at 97.00 from the February lows at 91.05. A break of 96.60/70 suggests the potential for further weakness towards the 94.00 area. We need to see a move above trend line resistance at 98.25 from the highs in September at 100.60 to stabilize and retarget the 100.00 area.

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