THE BIG PICTURE
Markets sanguine in the face of debt impasse: Stocks higher, VIX index lower, dollar lower and gold sharply lower it’s a familiar pattern recently. Stocks continued higher in Asia this morning too although S&P 500 futures were down 0.7% in early European trading. Apparently the markets don’t really believe that the US budget/debt ceiling talks are at an impasse. In the only market that’s taking this threat seriously, the T-bill market, yields in November and December have risen as well as yields in October, but yields for January and beyond are up only a few basis points, indicating that people may be thinking just that the problems will be pushed out further into the future as the two sides negotiate some agreement that will buy some time for more talks.
I see no indication that the two sides are any closer to an agreement. On the contrary, the Republicans seem shocked that the Democrats are not going to “compromise” with them and give them something face-saving to allow them to declare a “victory” in this fight that they started. Nowadays it’s hard to sort out satire from fact – the satirical headline that ran in one magazine, “Boehner: Obama stubbornly refusing to end the crisis that I created,” seems like a fairly accurate portrayal of the Republican position. Senator John McCain said of the Democrats, “if they try to humiliate Republicans, things change in American politics..” This has become a matter of pride, not politics. I expect the situation to get noticeably worse over the next few days and for the risk-on trades to reverse as a result. Indeed AUD was weaker this morning, the only currency to fall vs USD, but that was because home loan approvals in Australia fell 3.9% mom in August, the first decline this year. JPY and CHF were also a touch stronger this morning, but not significantly.
The US, Japan and Canada are on holiday, there are no indicators out of UK, so that leaves Eurozone industrial production for August as the only important indicator coming out today. It’s expected to rise by 0.8% mom, a turnaround from -1.5% mom the previous month. For the week as a whole, the focus will be on the monthly data dump from China. We had CPI and PPI for September out this morning (3.1% yoy and -1.3% yoy, respectively, both showing some acceleration from the previous month). On Friday we get 3Q GDP figures, industrial production, fixed assets investment and retail sales data, all for September. The other highlight will be the ZEW survey on Tuesday. In the US, we have two Fed surveys – Empire State and Phili Fed – along with housing starts and the leading indicator. In the UK, investors will be waiting for the all-important UK employment data Wednesday and retail sales on Thursday.
EUR/USD moved higher after Democratic and Republican leaders failed to resolve the budget and debt standoff. The rate found resistance at the upper boundary of the purple downward sloping channel and during the early European session it is testing the resistance barrier of 1.3564 (R1). A clear violation of that hurdle would signal the exit of the short-term channel and should target the short-term highs at 1.3644 (R2). However, the rate remains in its downward path, while both the RSI and the MACD oscillators still lie below their blue resistance lines. As a result, I consider the correcting phase mentioned in previous comments to be still in effect.
Support: 1.3461 (S1), 1.3400 (S2), 1.3324(S3)
Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).