The S&P 500 pulled back for a fifth day

The S&P 500 pulled back for a fifth day, although a 2.2% pullback over this time is not too concerning and the market is still nicely above the 50-day (medium-term) moving average.

In fact, the last time we saw such a shallow pullback in the US market over a five day period was in February 2004.

Talk of a government shutdown

Near-term support is seen between 1687 and 1690, however a deeper pullbacus

k should see moves contained at 1656 (uptrend support drawn from the November 16 low). Still, we seem to be in the eye on the storm, with regards to a potential government shut down and traders are eyeing moves from Senate majority leader Harry Reid on Sunday, when he should send over a redefined legislative proposal (which will strip out the language used to defund the Affordable Care Act) to be voted on in the Senate. Once passed it will be sent to the House, where House Speaker John Boehner will have the unenviable job of trying to convince the House to push through the legislation or face a shutdown.

This would not be the first time we have seen a shutdown in the US, with the most recent lasting twenty one days at the end of 1995, with sixteen more seen before that since 1976. The issue for markets is not just around any impact a shutdown could have around growth, which in effect is actually very minimal. Easily the bigger impact will be on the future of US monetary policy. Traders, economists, strategists and investors alike have either given up guessing when the Fed will taper or will make up its mind depending on the upcoming data. The thing is, if we do see a government shutdown, then subsequently government produced data will be held back from release, and thus we won’t get the October 4 non-farm payrolls, which is so important to the taper jigsaw; clarity and uncertainty would get that little bit hazier.

Asian and Australian markets

Asian markets focused on the ASX 200 yesterday, however the market’s focal point has been all about Japan. The reversal in the Nikkei and USD/JPY took a lot of traders totally unaware. While the earlier talk was around potential offsets to the increase in sales tax (due to be announced on October 1), the big move was caused by rumours that the Chairman of the Public Pension Fund Reform Council is due to speak at 18:00 local time.

The Nikkei subsequently rallied 1.8% to 14670, while USD/JPY moved to 99.12 (from 98.27), although local funds were happy to sell into moves above the 99 handle. The moves in the Nikkei certainly didn’t hurt the price action in the ASX 200, however it wasn’t the main kicker, given the index was already rallying straight after the unwind. The ASX 200 unwound and found support at the May 15 high of 5249.6, and that’s when we saw the buy the dip crowd come back in, with materials today putting in the points. Had it not been for the fact that the China CSI 300 was down 1.8%, we could have even seen the market higher.

With quarter-end in full view, money managers have been trying to etch out last minute performances from their funds, while it is also options expiry and there are always interesting moves around that. With options expiry and quarter-end in the back ground, we question how the market will fare on Monday, especially if the House rejects Harry Reid’s redefined proposal. Given the levels of emotion that is being expressed by House Republicans, you just can’t rule a government shutdown out, despite the probability being quite low.

Ahead of the European open

Europe is again looking soft, and once again there are few reasons for the bulls to put good levels of money to work, despite monetary conditions in the US and Europe being extremely favourable. Data will largely be a sideshow, with the weekly claims still likely to be affected by the computer glitches which have thrown figures out over the last couple of weeks, so pending home sales will probably be the US highlight given its leverage to US interest rates.

We also get to hear from Fed Governor Jeremy Stein (a current voter), who many will remember as saying last year that financial markets were overheating and in some ways started the tapering debate. Minneapolis Fed President Narayana Kocherlakota is speaking in the afternoon, Cleveland Fed President Sandra Pianalto and Kanas City’s Fed's Esther George (a current voter) also speak, therefore the narrative here should be key to the market’s focus. Kocherlakota commentary is always worth listening too.

In Europe we will look out for French consumer confidence numbers and in the UK revisions to Q2 GDP and Q2 current account balance. Good numbers here should help the FTSE, but also push cable back above 1.61.

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