Equity markets continue to exhibit a high degree of confidence that some form of deal will be arrived at this week, given some of the soothing noises coming out from various parts of Capitol Hill, with respect to a Senate agreement, however that represents the easy part given the problems lie within Congress, which has a Republican majority.
This rising optimism has seen the S&P500 continue to push higher, back above the 1,700 level once again with the highs this year back within reach at 1,725.
While economic confidence in the US recovery for Q4 continues to ebb away as the government shutdown enters its 15th day, the prospect of some form of agreement by the 17th October deadline continues to look unlikely; however markets don’t seem that concerned at the moment, and that could be part of the problem.
The lack of market pressure that we saw in the case of the European crisis has been mysteriously absent here and would appear to suggest that markets simply don’t believe that US politicians would run the risk of taking us past the deadline on Thursday.
We really should know from experience that politicians only act when the market boot is clamped down hard down on their throats, and there remains the possibility that may need to happen here.
There is, of course, the distinct possibility that a big dose of common sense could break out, and we could well get a deal in the next 48 hours.
The current market calm may change if we move beyond the Jack Lew deadline, and if we head into the weekend with still no deal, complacent stock market investors may start to get the equivalent of, to coin a well-known phrase, “squeaky bum time”, particularly with a $12bn social security payment due on the 23rd October.
Given last night’s positive finish on Wall Street Europe’s markets look set to open higher this morning with the main focus this morning on some key German and UK economic data.
In the UK the release of the latest inflation numbers is expected to point to a continued slowdown in CPI inflation, with the rate falling to 2.6% in September from 2.7%, with retail prices also expected to fall back from 3.3% to 3.2%.
These falls, while welcome don’t disguise the fact that inflation pressures are likely to remain fairly well elevated, particularly at a time when utility bills are once again set to rise in November.
In Germany, despite some disappointing factory goods orders numbers for August the economic data continues to remain fairly solid, and the expectations surrounding today’s release of the latest ZEW survey for October is expected to reinforce the positive vibes from the Germany economy, particularly with the DAX near its record highs .
Expectations are for a slight drop from last months 49.6 to 49.2, but this needs to be tempered by the fact that investors tend to be an overly optimistic bunch. The German IFO next week is a much better gauge of the German economy.
Back in the US we get a rare glimpse of some economic data with the release of the latest Empire Manufacturing survey for October, and this could well give us an early glimpse of any damage that the current uncertainty and government shutdown has done to the US economy.
Somewhat perversely expectations are pencilled in for a slight rise from 6.29 to 7.5, which to my mind would be a surprise given the concerns about any potential hit to the US economy caused by the current political impasse.
Back with politics in Europe the debate over how to deal with Greece’s 2014 fiscal gap and questions about banking union are set to continue to dominate proceedings at ECOFIN in Luxembourg.
They will also discuss further measures to improve access to funding for small businesses in Europe, particularly those in the weaker European economies where access to funding is either non existent or where the costs are simply cripplingly high, relative to rates in Germany.
EURUSD – the key support area continues to remain at 1.3450/60 area, however the price action appears to have the potential to be forming some form of head and shoulders pattern with a neckline at 1.3510. Given that, while above 1.3500 the potential for a move back towards the highs last week at 1.3645 remains. 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 – while above long term trend line support now at 1.5950 from the 1.4815 lows, the risk remains for a retest above the 1.6020 area. In the event we break below this three month trend line then we have the potential for further losses towards 1.5700, 38.2% retracement of the 1.4815/1.6260 up move. To stabilise we need to see a move back through 1.6020, to retarget the 1.6100 area.
EURGBP – the 0.8500 area continues to act as a bit of a barrier with the 200 day MA at 0.8524 behind last week’s highs. Given last week’s unexpected break higher the euro needs to hold above 0.8420 to stabilize and signal a move higher. A move back below the 0.8420 area retargets the 0.8280 level.
USDJPY – currently the US dollar continues to find resistance at the top of the daily cloud at 98.70; however a concerted break higher could well retest the 100 area. For this to unfold we need to stay above 97.60 area. A move back below the 97.60 area retargets the 200 day MA at 96.85.
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