Markets are being left in limbo as continual wranglings between the Democrats and Republicans over a deal to raise the US debt ceiling is proving to be the main driving force within the financial markets at the moment and it isn’t making the going good for the bulls.
If the US were to default it would cause untold damage to the financial markets and it wouldn’t only be US citizens who would suffer from seeing public services shut down, social service cheques not being sent out and parks being closed. Such an event would ripple through the credit markets causing borrowing costs to spike as a result of an inevitable downgrade to the US’s prized triple A credit rating. Banks, investment funds and even governments that have exposure to US debt may not get repaid further compounding their own funding woes causing the ripple to turn into a rather larger wave.
Despite what could happen if such a default were to occur, interestingly the bonds markets are not at panic stations just yet and the US bond auctions so far this week haven’t been a disaster. If the bond markets don’t seem so concerned, why are the equity markets getting the heebie jeebies? Even after the close last night FTSE futures continued to sell off and took down to almost as low as 5800. This morning things are still just as bad as they were after the market closed yesterday. We’ve been calling the market to open lower by some 50 points around 5800 throughout the night and we’ve commenced the session today just above there at 5810.
Not that economic data has really been a focus of the past few days, we do have some releases although they are not regarded as particularly big market movers, especially when the massive elephant is still in the room. This morning German unemployment is expected to rise on a non seasonally adjusted basis and fall on a seasonally adjusted basis, so I’ll leave it for you to work out whether that’s good or bad! Also, there’s an EU confidence survey followed by the weekly US jobless claims and then ending up with US pending home sales.
The dollar recouped most of its losses from earlier yesterday morning resulting in the euro slightly having the stuffing knocked out of it yesterday with EUR/USD breaking back below 1.4400. In the process it landed on its upward trend line around 1.4345 which is where it remains this morning. For some strange reason FX traders decided that it was time to buy the dollar in the face of this current crisis, whereas before they had been selling it.
Yesterday we made a small mention on the Swissy hitting new highs against the US dollar and the sort of negative effect this is having on their exporters. Low and behold rumours that the Swiss central bank might intervene in its currency’s strength did the rounds and this too was a contributing factor in the dollar’s recovery. This morning USD/CHR is at 0.8020 just about holding onto the 0.8000 level for now.
Cable saw a fair bit of weakness too, but that was mainly down to the rebound in the dollar and some down beat factory data however sterling faired better against the euro which really was the whipping boy yesterday. This morning cable is at 1.6325 and GBP/EUR is at 1.1375.
Gold bulls seem to remain in control as the little bout of profit taking was little more than that. At 1614 this morning and its silver cousin back below $41 at 40.30, these favourite metals are in limbo at the moment.
Crude initially fell after the weak durable goods orders from the US but rebounded after inventories showed an unexpected build up. So after dipping back below 118, Brent did what it’s spent most of the week doing by getting back above there after the inventory numbers. This morning the black stuff is at 117.70.