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European markets hurt by continued political brinkmanship in Washington - ETX Capital

Equities sliding [European markets dropping to a four-week low] safe haven core government bonds [UK gilts/German bunds] in favour as is this morning as we enter the second week of the US government shutdown. At the tail-end of last week, signs of some compromise on policies on the Republican side left markets feeling somewhat optimistic an agreement may be hammered out during the weekend but instead we got the opposite.

Top Republican John Boehner on Sunday said his party will not pass bills to fund the government or increase the debt ceiling unless Democrats/President Obama was willing to make concession on Obamacare programme and other issues. Obama has in recent days said he is not willing to make compromises on his healthcare plan so Boehner’s remarks reaffirm the markets’ fear that a deeply divided US Congress equals delays in finding a fresh budget which means the $16.7trillion debt ceiling won’t be raised and the US Treasury will run out of money by October 17, which means we are looking at a possible US default and subsequent meltdown of global asset prices.

If, that scenario was to play out, we are potentially looking at credit rating downgrades galore for the US, a huge flight out of US assets [dollar, equities, bonds] and holders of large amounts of US debt [such as China] taking a massive hit. On top of that, US economic recovery at the risk of being derailed; 800,000 federal workers still on unpaid leave and a huge number more expected if an agreement by lawmakers is not reached; business also stand to take a significant hit.

On a caveat, if US lawmakers fail to agree and the country defaults, the Federal Reserve will not taper asset purchases, not now, not this year and maybe not even during the first half of 2014, at least until the macro environment in the US improves. We have the Fed meeting minutes from the last policy meeting of September which saw the central bank surprising the market by not tapering – a move which in hindsight looks to be sensible given the current showdown in Washington. There’s little else the Fed can say or do at the moment other than hold its horses and wait until the political/fiscal situation is resolved or step in with emergency measures to prevent a meltdown, if, the US defaults.

There’s little out on the economic diary Monday so the attention is on US any noises from Washington. Macro agenda gets busier this week – we have German industrial production Tuesday, UK industrial and manufacturing production on Wednesday, BOE policy meeting on Thursday and US retail sales on Friday.

Ishaq Siddiqi
Market Strategist

ETX Capital
One Broadgate
London EC2M 2QS T

Lundi 7 Octobre 2013

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