The month ahead

In October, the focus of the markets is set to remain firmly trained on the US. And if September was about taper speculation, then this month is likely to centre on the upcoming debt ceiling deadline.

US shutdown diminishes taper fears

At the time of writing, the partial government shutdown is still in effect, leaving the market in a type of limbo. The upshot, in direct contrast to last month, is that the fear of any tapering of asset purchases has very much dissipated. One of the key knock-on effects of shutting ‘non-essential’ services is that some federal agencies, including the Bureau of Labor Statistics, will not release important statistical data such as manufacturing output or, most importantly, the number of jobs gained or lost. Without these important metrics, investors are ultimately not in possession of all the necessary facts.

Debt ceiling deadline looms

It’s often said that if the US sneezes then the rest of the world catches a cold, and this could be particularly relevant in the coming weeks should no resolution come for the debt ceiling deadline. The notion that the world’s biggest economy could default on its debts is unthinkable, and in many ways untenable. We have been to the brink before and succeeded in avoiding catastrophe – and this fact is guiding current market sentiment. The feeling is that the longer the shutdown lasts, the more likely a deal will be reached.

Should a more protracted downside take place in global equities, and specifically US indices, one could expect to see a dent in US consumer confidence. This in turn will have a detrimental effect on retail spending – a key source of economic growth for the US.

Metals shackle the FTSE

For the past three years we have seen the FTSE 100 gain in October. However, in September the UK benchmark underperformed, mainly due to the mining component being held back by lower prices in both base and precious metals.

Base metals move when the economy is growing and/or when inflationary pressures are building. Indications that the current worldwide growth is fairly tepid can be taken from the softness in the global mining sector. Rio Tinto is a case in point. Over the past year, despite a flurry to the upside from October 2012 to February 2013, the firm has failed to make any real progress, and share price is practically flat at 3022p. Randgold Resources has also been a casualty, falling 46% over the same period.

The UK mining sector as a whole attempted to rally in July, and saw broad-based gains of some 24% before topping out in late September. One could suggest that unless this particular sector finds some definitive demand, and reacts accordingly, we can expect to see performance lagging in the FTSE 100.

Politically and economically, the markets will have plenty to watch, so a volatile month is not out of the question.

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