Scoreboard: Deadlock drama

US stocks continued to fall amid a looming government shutdown, while Italy's political problems also hit European markets.

We’ll find out at 1400 AEST today for sure, but the US government appears to be close to a shutdown. As expected, the Senate rejected a House proposal that would pass necessary expense measures if ‘Obamacare’ were delayed for one year. Not the first time the government would have shut down if it does happen, but normally what we see in this situation at the very least is that all parties concerned pass some legislation at one minute to midnight to delay shutdowns for another day/week/month or something. In other words, they pass a short-term expense measure. As it turns out, the Senate has proposed just such a bill – the House just needs to pass it. (Shutdown: Be afraid, but not very afraid, October 1)

Anyway, now we are looking at the seventh session in eight that the S&P500 has declined – 0.6 per cent last night – with consumer goods, energy and financials leading the way down. The Dow then lost 128 points (15,129), the Nasdaq fell 0.3 per cent (3771), while stocks in Europe were off between 0.8 per cent and 1 per cent, hit by the US debt ceiling crisis and perhaps political problems in Italy.

The Italian stock market itself was down 1.2 per cent, although the 10-year bond yield fell about 16 bps to 4.42 per cent (up 10 bps for the month). The euro otherwise rose about 40 pips (1.3529) with neither forex nor bond markets too perturbed by comments from Jens Weidman, head of Germany’s central bank, the Bundesbank. He warned about the amount of sovereign debt that banks hold as capital on their balance sheets and suggested that they need to hold more capital to reflect the risks of holding sovereign debt. A not unreasonable call, as government bonds are one of the riskiest investments in town.

There’s not really much else to say with the debt crisis going on. It’s the only show worth watching. Well, maybe not worth watching, but it’s on.

For the remaining price action, commodities were all weaker for the session with gold down about $10, copper off 0.3 per cent and crude 0.6 per cent lower ($102.3). Finally, the Australian dollar is little changed at 0.9325 (from a high of 0.9354) while the yen is at 98.29, up from 97.82.

For the day ahead, and despite falls abroad, the SPI suggests our market might manage to hold its ground and even put on a few points, although that does follow big falls yesterday. Otherwise, the key event apart from a possible US government shutdown is the Reserve Bank cash rate decision, which we get at 1430 AEST.

No one is looking for a cut at this meeting, although a sizeable minority – 12 of about 30 economists – expect cut in November (Why 2014 will be the year of the rate hikeOctober 1). For today, I don’t think we will see much of a change in the central bank’s statement. In fact, I doubt we’ll see any, but having said that, if there are changes they will probably be on the dovish side. I think the board will want to signal to the market again its willingness to cut rates, and if anything they it even emphasise that a bit more given growing expectations that cuts might be done.

I believe the bank should be done with cuts, and I think it should begin to normalise rates, but I don’t think this board is of that mind. It has shown it will pursue an exchange rate target at all costs – whether that’s harming national confidence or even the risk of future financial distortions – and I haven’t seen anything to suggest it has changed this view. So I do think it will be more inclined to cut, especially given system credit growth, as we found out yesterday, is so low.

Outside of the Reserve Bank meeting we get house prices today at around 1000 AEST and retail sales at 1130 AEST. Then looking abroad we see quite a few manufacturing and business indicators. The Japanese Tankan survey is out just before 1000 AEST and the Chinese manufacturing PMI comes at 1100 AEST. Tonight the key economic data again is manufacturing – the ISM survey this time, and most forecasters expect this index to remain at 55. That level indicates a decent expansion underway in the manufacturing sector and the broader economy.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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