East and west concerns meet in the middle

The positive aggression with which Friday’s trade was moving would have suggested that the rumours of a deal on the debt ceiling were indeed fact.

  1. Shutdown enters day 14, debt ceiling deadline only four days away
  2. China’s trade balance
  3. Ahead of the Australian open

The ASX, Nikkei and the majority of Asia rallied hard on Friday, having watched their US counterparts jumping 2% on Thursday night than a further 0.6% jump on Friday, even after it became clear the President would not agree nor disagree with the proposal of moving the debt ceiling and not moving on the government shutdown.

Now we see that over the weekend the impasse has returned to the norm of partisan politics. TV networks were flooded with buzz words like ‘optimistic’, ‘progressing’ and ‘confident’ by every congressman and senator who crossed the TV screens, however none actually used the words ‘close to a deal’. It’s the word ‘confident’ that make me nervous; both sides of politics were confident the budget impasse would not turn into a shutdown and yet we are now heading into day 14 of the shutdown.

The language and demands have not changed, the rhetoric and the posturing have not changed and with four days till the debt ceiling is due, the market response over the last two days of trade is quizzical to say the least.

Cold hard facts are needed, a deal needs to be aired and the language from both side needs to change. The President is demanding a clean bill of health for both the debt ceiling and the reopening of the government. House Majority leader John Boehner is still talking about finding concessions for both the reopening the government and the on the debt ceiling.

There are many significant variables here. How much does the ceiling get raised by? Enough to cover short term obligations or a much larger move to remove this issue all together and see the debt ceiling issue put to bed?

What is the timeframe? The Republican idea on Friday was to move the debt ceiling to November 22 – six weeks away – yet the Democrats want a minimum of two years.

This all needs to be worked out by 15:00 AEDT on Friday or, as the IMF describes, we will see ‘serious damage’ to the global economy.

I expect trade to fall off today on the continuation of the impasse, however the expectation something will be done is completely overwhelming fear, which is understandable, however caution is not being used and the issues in Washington still have a long way to go.

China trade balance

Putting the issues in Washington aside, actual market-sensitive data from China was released over the weekend and it was not good news, but nor was it bad news.

Expectations were for a $25.2 billion expansion; however the fall in exports severely impacted this estimate as overseas shipments contracted 0.3% year-on-year to see the trade balance come in at $15.2 billion.

Australian stocks should benefit from a short term bounce after the import figures remained robust expanding at a rate 7.4%, however it is the export figures that will add to the pressure on Premier Li Kequang’s estimates for a GDP of 7.5% as domestic demand continues to outweigh international demand.

The GDP figure is highly influential on Australian cyclical mining stocks and considering the Chinese are still unwinding data effected by fraudulent invoices from late year, a currency that has appreciated 2.7% versus the USD (which is winding back Chinese export competitiveness) and extended holidays autumn holidays the 7.5% GDP figure may be missed.

With the release of its inflation data later today, estimates expect this to hit 2.8%; a further hit to competitiveness and may prompt the central government to further reign in cash stimulus as the drive to local infrastructure continues at a rapid pace.

Ahead of the Australian open

With most of the weekend’s news yet to be truly factored in, with the futures market are yet to open, the moves in the currency market are telling. The yen is moving higher and considering the inverse correlation between the yen and the Nikkei I expect this to hold true today and see the Nikkei fall.

The AUD is also sliding on the China data and may fall further if inflation jumps ahead of expectations. The impact to the ASX is still unclear at this point: the US leads are hard to judge considering the optimism around the political impasse. The China data is where I believe the impacts will be felt watch BHP, RIO and FMG for reactions to the China news.

With so many loose ends in Washington and Beijing trade today will be a choppy and may see quite trading and a wait-and-see as investors look to gauge the reactions of Europe and the US.

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