Scoreboard: Peace pipes

It’s not quite a deal but it is progress, apparently. House Republicans have proposed to lift the debt ceiling for only six weeks, which in my opinion hardly seems worth the effort. That’s especially the case when there are some unsavoury elements to the deal and there is no discussion as yet about the government shutdown.

Specifically, the GOP would like to ban the Treasury from using ‘extraordinary measures’ to avoid default. These are measures that both sides of politics have used for some time – so it obviously doesn’t make a great deal of sense.

Whatever the case and despite nothing much really changing – stocks on both sides of the Atlantic surged, the S&P500 posting is second best gain this year. Moves were huge and with about 30 minutes left to trade the S&P500 is up 2.1 per cent (1690), the Dow is almost 2 per cent higher (15,099), while the Nasdaq is 2.3 per cent higher (3762). Not bad given the surge in jobless claims. They jumped to 374,000 in the week to October 5, from 308,000 the week prior, which is the steepest jump in claims since November 2012.

However the result is almost certainly due to the shutdown and should be largely ignored – and it was. In addition to that, California is apparently still reporting problems with its new computer system. Outside of that though, price action was similar over in Europe, with the Dax up 2 per cent, the CaC 2.2 per cent higher and the FTSE100 up 1.5 per cent.

While stocks may have surged, price action was a little more subdued elsewhere – commodities in fact were mixed with crude and copper positing reasonable gains of 1.5 per cent ($102.9) and 0.5 per cent respectively, while precious metals fell – gold down almost $20 to $1287, while silver was off 1.2 per cent. I’m not sure how much of that is taper talk or a reversal of the ‘fear’ trade. Although there wasn’t really a fear trade to begin with.

In terms of the taper, the Federal Reserve is sticking with its strategy of vagueness, I guess to try and desensitise the market. So St Louis Fed President James Bullard (who is a voter) is of the opinion that the October meeting is still “live”, but that in his opinion it’s probably not wise to taper while the debt/budget crisis is occurring.

The US 10-year yield slipped a couple of basis points on that to 2.69 per cent while there as a bit more action on US Treasury bills – although in the end, the yield on the one month was down to 0.25 per cent from 0.27 per cent. A lot has been made of the spike in short dated Treasury bill yields – the one month spiking to 0.25 per cent or more, from effectively 0 per cent (a little over). Same with the spike in credit default swaps. I don’t think either is actually reflective of broad based concerns that the US will default.

Bill yields are up on the chance of a delay rather than a default and CDS are only traded by a handful of traders – the market is comparatively illiquid and prices mean little to the economy or broader market. I’m more concerned that there are fund managers out there who were actually buying Treasury bills in the first place at a 0 per cent yield – a negative real yield. That’s the greater concern for me.

Otherwise there wasn’t much going on. The Bank of England left rates unchanged and didn’t print any more money – nothing exciting – and so for the remaining price action, the Australian dollar is at 0.9460, up about 60 pips from yesterday afternoon. The euro is 30 pips higher (1.3525) while the yen is at 98.23 from 97.77. That’s largely it.

For today the SPI points to a 1.4 per cent gain for our market. Otherwise there isn’t much in the way of data – maybe today we’ll get that Chinese loans and money supply data, while US retail sales might also come out (alongside the Michigan Uni consumer sentiment index).

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.