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The government shutdown will be delayeduntil January 15 and the debt limit till February 7 – as the votes came in at 81 votes to 18. The House then subsequently did their bit and came to agreement, voting the deal through 285 to 143.
The key concern I had yesterday was whether John Boehner would get his marching orders as Speaker of the House, due to the disregard of the Hesbert rule (which requires the majority of House Republicans to vote through any proposals), with only 87 of the 232 House Republicans voting ‘yes’. However from what I’ve seen so far, I see no reason to think this is going to be the case, which should be positive for risk assets.
The next thing markets need to (and to a degree are already doing) think about is how stressful negotiations will be in January and February, when we get to see both political parties revisiting negotiations to avoid a fresh government shutdown and curb the US treasuries ability to borrow in the capital markets (i.e. debt ceiling). I was quite bearish on this situation yesterday, but I think with John Boehner continuing at the helm, it makes so much more sense for the Republicans to now start thinking about the mid-term elections and try to win some much needed PR. They have taken a hammering of late and they now know (and Republican Senator Peter King said it himself today) that they can never win the fight against Obamacare. Therefore, using the threat of a government shutdown or even default just doesn’t work for them, so why would they try it again when in theory it could see the US public lose even more patience with them?
It also seems logical that the US treasury will go to town in the bond markets prior to the February 7 debt ceiling deadline and borrow substantially to keep them funded and meet its obligations for maturing US T-bills on February 13, 20 and 27. Attracting capital there won’t be an issue at all as we have seen over the last few weeks.
We are back to looking at central bank policy and earnings
So with the US fiscal drama’s seemingly priced into assets, we can go back to looking at earnings and global data and how that feeds into different central bank’s policy settings. It will firstly be interesting to see when the US release its September non-farm payrolls and while this data print is now backwards looking in nature, a good number could set the scene for a ramp up in tapering talk. US earnings of course are in full flow and while I expect to see cyclically focused stocks aiding the S&P 500 total sales growth (and not just financials this quarter), it’s not hard to imagine companies which derive a large percentage of revenues domestically talking vocally about the headwinds they’ve seen from the sixteen (and a half) day shutdown.
Global equities look like they want to push higher and we have seen that in Asia today, with gains across the board. However, for global money managers it’s a question of which region offers the best value right now. It’s interesting to see that from a pure current price earnings (P/E) basis, Europe still offers the compelling value, although this is partially offset by its tepid growth forecasts. Australia looks lofty with a current P/E of 21x, however this is still offset by one of the highest aggregate dividend yields, which at 3.5% is only really bettered by Italy, Portugal and Luxembourg.
The fact is, with the US debt debate seemingly pushed out until the New Year, where it possibly won’t cause as big of a headache (hopefully), and with monetary policy across both the developed and emerging world still very accommodative, risk assets like equities should still push higher. In fact, with talk of serious amounts of cash on the sidelines, this could be the next catalyst for pushing stocks to print higher highs. Short interest in global markets is still relatively elevated; take the S&P 500 for example; having short interest of just over $7 billion (one of the highest levels all year). At some stage the bears will cover shorts as they have seen the kitchen sink being thrown global markets and pullbacks have been orderly and shallow. Of course some of the short interest will be portfolio hedges, as well as hedge fund who run long/short portfolios, but it’s those who are merely speculating on lower levels who will be feeling the pain. Remember there is an opportunity cost in every position.
I continue to like global equities, while AUD looks good against the CHF, EUR and GBP. Tomorrow’s Chinese data dump will be interesting; with Q3 GDP expected at 7.8%, while industrial production like to increase 10.2% on the previous corresponding period. If I was going to be short AUD, then I would respect the downtrend and look at short AUD/NZD trades, with a stop at 1.1440.
Our European index opening calls reflect a market that has priced in agreement. However there is still plenty to keep traders occupied. On the docket we get UK retail sales (expected to increase 0.3%) and with cable having broken its uptrend (drawn from the August 2 low), it could be topping out and ready to head lower in the coming weeks. We also get US jobless claims, which after last week’s big rise should come back to more realistic levels. On the earnings side, traders will be looking out for numbers from Goldman Sachs, Verizon, Baxter (lead in for CSL) and Google.