Markets still jumpy as US still pending a deal on the debt ceiling ahead of tomorrow's deadline

Tom Tong16/Oct/2013Currency Updates

GBP

Sterling enjoyed a good day yesterday rising against the euro and USD. Inflation data came in slightly higher than expected. This again caused chatter of the BOE holding off further economic stimulus into the economy. The Office for National Statistics said consumer price inflation was 2.7% in September, unchanged from August beating wide calls of a dip. The focus now shifts onto the release of today’s unemployment data. They are forecast to show a steady rate of 7.7% The BOE has said QE will remain unchanged until unemployment rates hit 7%. A quicker drop in numbers could see an earlier rate rise. Indeed the market already disagrees with the BOE as to when unemployment will hit 7%

Presently markets are far more sensitive to unemployment figures. If we see a nudge lower in the data, sterling could rally. With the recent release of disappointing data for the U.K sterling strength is fragile. Furthermore, right now resistance levels are vital. Sterling could suffer against the dollar if a relief rally ensues the anticipated resolution of the U.S crisis.

Data release today- unemployment levels and average earning both will be watched avidly.

EUR

The euro traded relatively flat yesterday against its basket of most traded pairs. It was down against sterling and dollar as it returns to normal trading levels. German Bond releases were the notable macro data release, these were little changed before euro area inflation data. Benchmark 10-year yields reached a three-week high before the nation sells 5bn EUR ($6.76 billion) of two-year notes. Consumer prices in the 17-nation region rose 0.5% in September after increasing 0.1% a month earlier.The survey showed that economic sentiment rose to 52.8 for the month of October and current situation dropped to 29.7 vs. forecasts at 49.6 and 31.0, respectively. In the same tone, EMU’s economic sentiment rose to 59.1, missing the median at 59.4.Recent euro highs have seen if float at higher than normal trading levels. The market is now waiting for it to prove that the recovery is not limited to the stronger eurozone economies and is relevant for the likes of Spain and Greece and not just Germany. Against the dollar it was slightly down as market reports in midday trading buoyed the euro thus retracing it to its normal traded level against the dollar. Although down against sterling it still hovers near 6-week highs. French CPI enjoyed slight gains and German import data was encouraging. However, as gains were minimal it was not enough to move the currency.

Data releases of note out of the eurozone today include – CPI and trade balance these will be avidly watched as they so heavily affect ECB monetary policy.

USD

Groundhog day in the US. Another day with no deal fuelling inevitable pain as the dollar slumped against its most traded basket. Notably down against the euro and sterling with resistance levels now coming into play as traders decide whether to jump or be pushed. US stocks down with the DOW, NASDAQ and S&P 500 all losing yesterdays gains.

Markets will open today with no deal made. House Republicans yesterday tied themselves in knots as Boehner refused to put the key Senate bill to the vote. We saw a breakdown in communication between Republicans and Democrats and dodgy dealings as the Senate attempted to pass it’s own bill which caught the House off guard. Whatever happens now, any deal to avert disaster will be followed by further chaos early next year.

Yesterday the House was hammering out an attempted agreement to re-open the federal government through January 15 and to raise the debt ceiling through February 7, contingent on reaching a long-term budget deal by mid-December. This likely would pass the House. Most of its support would come from Democrats, but a number of Republicans not facing serious Tea Party challenges in the primaries would vote for the bill too. However, shockingly Speaker Boehner either personally objected to its provisions or was too scared of the Tea Party to bring it to the floor yesterday, preferring to discuss his own bill with his members.

Jumpy markets will open today with no deal, and with the added thrill of the threat of a downgrade by Fitch. The U.S credit rating has been placed on negative watch by Fitch. Fitch released a statement last night saying- “the repeated brinkmanship over the debt ceiling dents confidence in the effectivenes of the U.S government and political institutions and in the coherence of economic policy”. The negative watch by Fitch will further erode investor confidence in the U.S which is already walking a tightrope.

The market response was significant with 1-month Treasury bills maturing on October 31st spiking 21bp to a new debt ceiling peak. People are stepping away from the market and investors are alarmed. As a result yields on T bills are now approaching a 2 year high.

However, due to the partial shutdown the sky will not fall immediately The estimated fatal date of this Thursday for a shutdown is not entirely accurate. It does not account for the drastic shutdown of a third of the Federal government. These measures have saved around $80bn. This slightly pushes back the crunch point. If the situation is not resolved by Thursday market confidence will suffer catastrophic blows. The U.S treasury secretary has been careful not to say the U.S will entirely run out of cash. He has admitted something equally serious, in the sense that they will have run out of borrowing authority. The U.S will have cash in the wallet, but the cards have hit overdraft and nobody will be willing to lend more.

Although in a state of shock and panic the market still feels the crisis will be resolved, temporarily at least. Admittedly nobody knows when this will happen and expect markets to become more jumpy and upon the market opening tomorrow.

Data releases of note out of the U.S today include housing market index with a slight dip expected as a result of higher rates. We also have two bond auctions of T bills. They are being sold at fresh yield highs as a result of rocked market confidence in the U.S.

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Written by Tom Tong

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