Red October as macro issues drag

House majority leader John Boehner is still managing to hold the Republican Party together as a fault line emerges between centralist Republicans and the Tea Party.

- US shutdown enters a second day with no end in sight

- Regional market closures lead to low volumes  on the local market

- RBA rates cycle debate rages on

Republicans are calling for the GOP to back down on its stance on the Affordable Care Act and the Tea Party is calling on the GOP to take a stand against the President.

This leaves Boehner in a very precarious position; if he ‘compromises’ (something the Tea Party will not do under any circumstances) and removes the amendments to the ACA, the government would reopen. However it is very possible he would be replaced as majority leader by the Tea Party members who see compromise as weakness. The market reaction to this would be interesting as a majority leader aligned to the Tea Party with the debt ceiling negotiations approaching will see all bets off.

If he holds the line and fights as the Tea Party want, he risks the party’s primary vote. Polls are showing that the public and media are tending to side with the Democrats. If he digs in as the Tea Party wants, every day the shutdown continues could be to the detriment at the primaries which are coming up inside a year. He has a very delicate task; one that looks on paper as a lose-lose. 

US volatility increases

The political wrangling is putting even more volatility into the US markets. Overnight the DOW and S&P erased all the gain made on Tuesday (which was only the second positive print on Wall Street since the September Fed meeting).

With the debt ceiling now only 15 days away and the fact that fault lines are emerging inside the Republican Party on the Continuous Resolution (CR), expectations are for similar lines to be drawn on the debt ceiling.

We highlighted the T-Bill due on October 24; theory would suggest this should be winding down to face value, however since the shutdown it has spiked back up as the risk premium for the bill increases due to fears of default and the ceiling not being lifted.

Ahead of the Australian open

Moving to the Australian market and trading in the ASX has been mysterious to say the least. It has managed to buck global leads and has finished in the green twice in the last five trading days when expectations were for it to fall.

However, volumes at the moment are well below the 30-day average with trade yesterday on registering $3.2 billion in turnover. The fact China is on holidays for golden week, plus it is school holidays in Australia, means that investors are tending to sit on the sidelines and are waiting for volumes to return. The price action at the moment is weak because of this and may not be a complete reflection of where the ASX will head in the next month.  

There is certainly a feeling that the longer the macro issues drag out the stronger the red on screen will become. However, the defensive trade on the ASX does look strong as yield investors add support to the banks, the supermarket chains and Telstra rates remain at record lows and yield becomes a positive trade again.

What is also clear on rates is economists are now moving away from their November rate calls. The statement on Tuesday really did sound like the RBA has put the easing cue back in the rack for at least the rest of the year. We feel that it may stay there permanently, media hype around property bubbles and clearance rates are creating fears. The fact that Sydney is on a price tear will almost singlehandedly keep the RBA out of the market despite the rest of the country moving at a slower pace.

What is highly possible now is a rate hike. If property takes off, particularly secondary market homes, the RBA may have to slow lending to property despite the fact that retail spending is still low to historic levels and the non-mining sector is still struggling to keep up.

Ahead of the open we are calling the ASX 200 up six points to 5222 (+0.12%) while BHP’s ADR is suggesting the stock may find support after three days of losses to pop up 28 cents to $35.59 (+0.81%), as iron ore stabilises.

Trading today will again be light as New South Wales, South Australia and Tasmania all approach Labour Day holidays which, coupled with China being closed, will make for a fairly subdued moving day.

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