Debt ceiling the last hurdle for global markets

The taper debate has now been pushed to one side and is unlikely to be touch until the December quarterly meeting.

The issue with the December meeting is that it’s within two months of Chairman Bernanke’s exit, which could mean that taper won’t start until March next year once the Chairperson is sworn in (even though St Louis president Jamie Bullard said on Friday that October is a possible taper mover - which triggered the fall on Wall Street).

The second hurdle was cleared this morning and eurozone and the EUR/USD got a strong tick of approval with the German elections going the way of Chancellor Merkel.

Angela Merkel’s Christian Democratic Party (CDP) won 41.8% of the vote; the highest poll tally since the reunification. Some polls are suggesting the CDP could even get a one seat majority. That would be the first time since 1957 and Merkel would be second leader since World War II to do so.

It is a strong result for the Germans; her party has overseen very low levels of unemployment (lowest in almost two decades). The country has vitally wiped out its budget deficit and has seen consumer optimism rise, along with wage growth.

However, she won’t have it all her own way. Her closest ally in the Freedom Democratic Party (FDP) was eliminated from the race, having received only 4.7% of the vote and needing 5% to gain a seat in the Bundestag. This means she will have to deal with the Social Democrats and/or the Greens - both of which are on the other side of the political divide. Both look like playing hardball on the issue of minimum wage and other social reforms.

The euro, however, did not mind the prospect of a ‘grand coalition’; rising 0.2% to $1.355 even after the grand coalition scenario looked the most likely. Over the next four years Chancellor Merkel will face a possible third Greek bailout, issues around the southern states with Portugal still showing signs of strain and Spain with record unemployment.

As the biggest contributor to the eurozone, the possibility that her third term will be similar to her second is high, as southern states grow even more resentful of the austerity Germany is imposing for aid.

The markets will react positively to election news. The DAX is already at record highs and the return of the government should give it another push higher, having eased on Friday night. What might slow the possible green on screens movements are the events in Washington.

The debt ceiling is the final hurdle for the globe, having (somewhat) cleared the taper talk debt and now the German elections. The debt ceiling ‘negotiations’ look like being another farce as the party hold each other to ransom. On Friday night the House of Representatives passed a bill led by the Tea Party to cut funding to Obamacare amongst various other government programmes, this will now be handed to the Senate to vote on.

The Democratic led Senate will pass the bill, however it is certain they will remove the fund cuts to Obamacare and pass the rest. House leader John Boehner has stated he ‘will not accept anything less than full defunding of Obamacare’ or he will hold the government to ransom by shutting it down; meaning the debt ceiling will not be raised.  

This kind of bluster and rhetoric will make for some very nervous trading days despite the general consensus that the ceiling will be lifted. What might happen is a technical default, with the US government having to extend the payment dates for coupon payments due on September 30. This would be a major embarrassment for the President and a volatility trigger for currency and equity markets alike. Downside risk is a real possibility as this week moves on.

Ahead of the open we are calling the ASX 200 down 34 points to 5242 (-0.64%) as the local market follows the US markets lower. China is going to be front and centre in Asian trade today with the release of the HSBC flash manufacturing PMI data. Estimates are for the small expansion seen in August to ramp up further; up 0.8 points month-on-month to 50.9. This will trigger risk on and may reverse the opening calls and the possible slide in AUD – despite the RBA trying to talk it down.

BHP’s ADR is suggesting the stock will drop 47 cents to $35.92 (-1.29%) again on the back of trade in the US. Trade today does look like being mixed as positive and negative factors weigh on investors’ minds. These trade moves will continue all week until the debt ceiling debate is concluded. 

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