World Week Ahead US debt talks turn frosty

Monday 14th October 2013

US lawmakers' wrangling over the debt ceiling and budget will remain centre stage in the coming days, pushing earnings season into the background.

The optimism that talks were finally progressing last week and helped propel Wall Street sharply higher on Friday, faded over the weekend as the gap between Democrats and Republicans seemed to widen rather than narrow.

In the past five days, the Dow Jones Industrial increased 1.1 percent, while the Standard & Poor's 500 Index gained 0.8 percent, and the Nasdaq Composite Index edged 0.4 percent higher. Nasdaq's weaker performance reflected a decision by some investors to sell some of the year's highest flying tech stocks to lock in profits.

Despite the pessimism late Saturday in Washington, investors still appear to expect a timely resolution.

Ken Fisher, who oversees US$49 billion at the Woodside, California-based Fisher Investments, told Reuters there was a "maybe 0.0001 percent chance" the debt ceiling would be breached.

"People have been saying that things are different this time, but Washington is just a distraction for markets, simple as that," Fisher told Reuters. "If a default was possible, you would see bond prices fall through the floor. Eventually you have to stop listening to the people crying wolf."

Over the weekend, bankers including JPMorgan Chief Executive Officer Jamie Dimon warned about the consequences of a US default.

"The United States cannot default and, in my opinion, will not default," Dimon during a panel discussion at a financial industry conference, Bloomberg News reported. "It would ripple through the global economy in a way you couldn't possibly understand."

Deutsche Bank chief executive Anshu Jain said default would be "utterly catastrophic."

Both bankers were echoing the sentiment of other global authorities including Christine Lagarde, head of the International Monetary Fund.

Beyond the Beltway, the oft-used description for Washington politics, investors await the next wave of US quarterly results including GE, Goldman Sachs, Google, Citigroup, Coca-Cola, Yahoo, Bank of America and Verizon.

S&P 500 companies are expected to post earnings growth of 4.2 percent in the quarter, down from the 8.5 percent rate that had been forecast on July 1, according to Thomson Reuters data. Of the 31 S&P components that have reported thus far, about 55 percent have exceeded estimates.

Aside from US corporate earnings, there are plenty of policy makers to watch in the coming days too.

On Monday, Federal Reserve Chairman Ben Bernanke is scheduled to give a speech to the Bank of Mexico conference in Mexico City; New York Fed President William Dudley will speak at the same conference on Tuesday. Also on Tuesday, San Francisco Fed President John Williams will talk about the economy in San Francisco, while Dallas Fed President Richard Fisher will speak on the outlook and monetary policy in New York.

On Wednesday, Fischer debates breaking up big banks, in New York, followed by a speech to the Economic Club of New York the next day.

Also on Thursday, Chicago Fed President Charles Evans speaks on economy and monetary policy in Madison, Wisconsin; Kansas City Fed President Esther George will talk about the economy in Oklahoma City; and Minneapolis Fed's Narayana Kocherlakota will speak on monetary policy in Butte, Montana.

On Friday, Chicago Fed's Evans will talk about economy and monetary policy in Chicago; Fed Governor Daniel Tarullo and New York Fed President William Dudley speak at a Fed conference on resolution of systemically important banks, in Washington; and, Fed Governor Jeremy Stein talks on managing financial imbalances in Boston.

In terms of economic data, the calendar offers the Empire State manufacturing survey, due Tuesday, the consumer price index and housing market index, scheduled for Wednesday, housing starts, jobless claims, industrial production and the Philadelphia Fed survey, all due Thursday, followed by leading indicators on Friday.

The Beige Book is scheduled for release on Wednesday.

At the end of the day though, it's the political clouds that are casting the largest shadow on the outlook.

In Europe, the Stoxx 600 gained 0.6 percent last week.

Economic data due in the coming days include euro-zone industrial production, on Monday, euro-zone ZEW economic sentiment, on Tuesday, and euro-zone CPI on Wednesday.

BusinessDesk.co.nz

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