World Week Ahead Showdown or shutdown

Monday 30th September 2013

All eyes are on the partisan political brinkmanship in the US Congress as the deadline for a budget deal to avert a government shutdown at midnight on Monday in Washington is closing in rapidly.

While there is still optimism for an agreement, investors realise that it ain't over till the fat lady sings. Last week, the Standard & Poor's 500 Index suffered its first weekly decline since August, shedding 1.1 percent. The Dow Jones Industrial Average dropped 1.3 percent. The Nasdaq Composite Index eked out a 0.2 percent gain over the past five days.

"We are conditioned for an 11th hour deal, but you can't take anything for granted," Eric Green, global head of rates, currency and commodity research at TD Securities in New York, told Reuters.

Indeed, on Saturday Republicans in the House, not unexpectedly, rejected an emergency spending bill approved by the Senate. Failure to pass a bill before the new financial year starts on Tuesday may result in a government shutdown.

That, in turn, might mean that economic data such as the latest government's monthly employment report, scheduled for release on Friday, won't be released either. The Bureau of Labor Statistics will stop operations, while economic reports from the Commerce Department also will be suspended.

However, the bigger concern is the potential dent to the still sluggish American economic recovery.

"A government shutdown would be a fiscal cliff that's big enough in this case to drive the economy into a recession and I think that the market is increasingly worried about that risk because the risk seems to be rising," Sam Wardwell, an investment strategist at Pioneer Investments in Boston, told Bloomberg News.

US Treasuries, for the time being, are benefiting from those concerns. Yields on the 10-year bond fell 11 basis points to 2.62 percent last week; they touched a two-year high of 3.01 percent on September 6.

"We have the non-trivial risk of a government shutdown looming and the greater risk of coming to a reasonable negotiation on the debt ceiling that ultimately threatens growth and is supporting Treasuries," Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York, told Bloomberg News. "The risks to economic growth may keep the Fed not tapering into 2014."

Others are more optimistic.

"Every situation we've had like this over the past few years has been a buying opportunity," Andres Garcia-Amaya, global market strategist at JP Morgan Funds in New York, told Reuters. "This is just another wrinkle, not a time to change your strategy."

US reports scheduled for release in the coming days include Chicago PMI and the Dallas Fed manufacturing survey, both due Monday, the PMI and ISM manufacturing indexes, and construction spending, due Tuesday, the ADP employment report, due Wednesday, and weekly jobless claims, factory orders and the ISM non-manufacturing index, due Thursday.

Federal Reserve Chairman Ben Bernanke and St Louis Fed President James Bullard are scheduled to speak at the St Louis Fed's Community Banking Research Conference on Wednesday.

On Friday, William Dudley, president of the New York Fed, said he wants to see more signs of economic strength before the central bank starts to taper its asset purchases.

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

Investors will be focused on Wednesday's meeting of European Central Bank policy makers.

Of 19 economists surveyed by Bloomberg News, 11 said there's no requirement for another long-term refinancing operation from the ECB, which ECB chief Mario Draghi flagged as a potential policy move last week. Five economists said new loans will be needed this year, while three said they'll be needed in 2014.

Italy has returned to political uncertainty as five ministers, all from Silvio Berlusconi's party, resigned on Saturday from Premier Enrico Letta's coalition government. The issue is the potential expulsion of Berlusconi from the Senate following his recent conviction for tax fraud.

The European economic calendar this week include Germany's retail sales and euro-zone CPI data, both due Monday, euro-zone unemployment data, due Tuesday, as well as euro-zone retail sales, due Thursday.

BusinessDesk.co.nz

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