US Senate deal is found

Within seven hours of the debt ceiling hitting the proverbial red button a deal has been found as bi-partisan talks in the Senate gets the nod.

The interesting part is how the deal is structured. The proposed deal (yet to be voted through the House at the time of writing but it will be) sees the 16 day shutdown ended, with the government to be funded through to January 15. The re-opening of the government comes with a tight funding leash and is certainly nowhere near the $1.06 trillion in spending some politicians from the democrat side wanted. This is a clear concession, however it’s probably the only ‘concession’ the democrats have given in this deal.

The debt ceiling will be raised till February 7; something most Republicans from the House did not want without more controls. The can has been kicked further down the road, as every commentator suggests, the reset button has been pushed and we will go thought this all again in two months time.

However, I see this deal as a very clever ploy on the part of the Democrats; the next round of sequester (tax hikes and spending concessions) kicks in on January 15, something that should please the Republicans. With the January 15 sequester kicking in, the budgetary impasse that has to be negotiated by December 15 as part of the proposed deal may go off without a major hitch as these concessions may be enough to settle differences and will see the Affordable Care Act left alone.

With the Republican side publically admitting defeat on defunding the Affordable Care Act it seems unlikely that come January 15 a shutdown would be repeated. The brand damage has been brutal for the GOP and it is unlikely they could use up more goodwill with the electorate to try this again in January. This means the Democrats should see a victory on the ACA once and for all.

The market response overnight, particularly bond markets, was expected. The S&P got within 0.6% of its record close as short-term bond rates plummeted. Normal trading should return over the coming days as earnings season hits full swing.

Where to from here for ASX?

I had a question from an investment colleague overnight: could the ASX be at 4700 or 5500 (or somewhere in-between) by this time next week? And where do you see it?

My judgement is higher; I don’t see 5500 by Thursday week but certainly higher than it is currently. The leads out of Europe and the US during this period have been ones of strength; over the last week the S&P is up 3.66%, the DAX is up 3.28% and the ASX is lagging this move, up 2.11%.

The momentum is there; cyclical trades look to be moving higher and the money markets are breaking up even during this six week period of uncertainty. The expectations now are for the ASX to start testing the year-to-date high of 5314 as investors jump onto the bull market.

If broken, the next level to watch is 5421 which is the 62% retracement of the 2007 high to the 2009 low. I see that as the year-end target and with Westpac, ANZ and NAB due to report in the next four weeks, a rally into the results is very probable. If cyclical stocks find the support most have be talking about, this level is very possible.       

Ahead of the Australian open

With last night’s news yet to play out in Asia we are expected to move higher on the deal in Washington. Ahead of the open we are calling the ASX 200 up 11 points to 5274 (+0.21%) however BHP’s ADR is suggesting the stock could fall down three cents to $35.75 (-0.08%), having rallied strongly yesterday.

There are several production reports due out today and that could overturn the possible lead from BHP, with Fortescue and Atlas Iron the ones to watch. Considering the reports from Rio Tinto and Mount Gibson over the last three days, expectations are running high for these pure plays to follow suit.

Woodside and Newcrest are also releasing numbers, with WPL in the spot light considering its public statements directed at the WA government around the development of the Browse Project. WPL has admitted the project is heading towards a Floating LNG (FLNG) platform, having shelved the onshore processing plant design at the start of the year (something the WA government doesn’t want).

Trade will be positive today however I am wary of the fact it could be factored in and profit taking could hit the screens in the afternoon. All-in-all however, it will be a green day for trading.

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