Scoreboard: Reality bites

Global equities took a hit as the market started to get serious about the US government shutdown.

Recall the unusual commentary from the European Central Bank, the Federal Reserve, the International Monetary Fund, the US Treasury and President Obama about how complacent markets were about the shutdown? Well I suspect policy makers will be much more relieved at market moves overnight – finally, investors are taking this seriously – because we saw a decent sell-off on global equities.

At the time of writing (about an hour left to trade) the S&P500 was off almost 1 per cent (1659) with the Dow off 122 points (14,813) and the Nasdaq 1.9 per cent lower (3699). By sector, telecommunications, tech stocks, basic materials and healthcare were the key underperformers, with only utilities in the black.

As yet, there really isn’t much new news on the shutdown/default front though. President Obama has said he is willing to talk with Republicans but only after the government has reopened and the debt ceiling has been raised. The House for its part is considering legislation that outlines a framework for talks – the Senate legislation that would temporarily raise the debt limit. On that front there is still no real sign that the market is actually concerned about a default.

The US 10-year Treasury yield is little changed at 2.63 per cent overnight. Having said that some are getting excited about moves in the Treasury bill market where yields are rising. It’s not that investors doubt they will get paid, but they are pricing the risk of at least a delay. So an auction of one month Treasury bills went out at a yield of 0.35 per cent overnight – up from 0.12 per cent last week. Still ridiculously low, but it is higher. 

Elsewhere on the price action, the Australian dollar is at 0.9438 which isn’t too different from yesterday afternoon, although it did hit a high of 0.9482. The euro is then at 1.3565, also little changed although it was over 1.3605 at the high. The yen is then unchanged at 97.05, while in the commodity space, gold is down about $5 at the time of writing to $1320. Copper is off 0.1 per cent and crude is up $0.5 to $103.5.

Bits and pieces otherwise. On the Fed taper front, the Philadelphia Fed President Charles Plosser (non-voter this year) said that the The Federal Open Market Committee missed a great opportunity to taper in September and that failing to do so undermined the Fed’s credibility as well as confidence in the economy. The Cleveland Fed president Sandra Pianalto (also not a voter) suggested she would have preferred to see a taper at that meeting, noting that improvements in the labour market had been substantial enough to warrant it.

Then the IMF cut its forecast for world growth by 0.5 per cent (compared to July) over the next two years – 2.9 per cent in 2013 and 3.6 per cent in 2014. Growth in the US is expected at 1.6 per cent and 2.6 per cent, Chinese growth is expected at 7.6 per cent and 7.35, while Australian growth was forecast at 2.5 per cent and 2.8 per cent from 3 and 3.3 per cent respectively.

Finally on the data front, German exports rose 1 per cent in August after a 0.8 per cent fall the month prior, while imports rose 0.4 per cent after a 0.3 per cent rise. German factory orders were down 0.3 per cent. Then for the US, the NFIB small business optimism index was little changed in September at 93.9 from 94.1.

For the day head, the SPI suggests our stocks will fall 0.7 per cent. Otherwise the key data release for Australia will be consumer confidence. So far both business and consumer confidence have staged a decent bounce-back, with two key developments driving things.

There’s the change in government obviously, but also expectations the Reserve Bank is done cutting rates – or at the very least slowing it down. That naturally helps nurture a lift in confidence, because obviously if the RBA is not cutting rates, then business and consumer think things mustn’t be so bad after all. And they’re not.

Otherwise for tonight we get industrial production in the UK and Germany, while the FOMC minutes are also out.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.