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Mike van Dulken, Head of Research at Accendo Markets, commented in his Weekly Roundup to clients,
US politicians have decided that the best thing for the nation is to allow its government to go into partial shutdown rather than back down on conflicting budget views surrounding a presidential policy aimed at making medical care affordable for everyone. This may only be day 4 of the shutdown but it’s still potentially only early days and Democrat Obama has been clear about the negative impact on US Q4 GDP, with growth already fragile and the jobs situation still precarious. He even emphasised the point to Wall Street’s banks in an effort to get more pressure put on the Republicans to back down. Worse still, market watchers such as myself are being deprived of economic data like Non-Farm Payrolls on which to base market (read QE3 taper) assumptions. Boooo!
Equities and US dollar under pressure all week following passing of Tuesday’s budget deadline. However, FTSE100 back to 6460 level we oscillated on Monday. This suggests no panic – good news. A government closed for business isn’t ideal, but it’s happened before and history suggests it’ll happen again. While we can’t know how long the stalemate lasts, it sounds like Republicans don’t want to see disagreement with the Democrats interfere with raising the debt ceiling before 17 Oct, something which could result in a more worrying sovereign default (virgin territory for markets).
As the week comes to a close and while markets are making a little progress (off their lows, trying higher) I believe we can take a some positives into the weekend. Firstly, a budget solution would surely result in at least a brief relief rally, with uncertainty removed. Secondly, House Speaker Boehner has said he won’t let the US hit its debt ceiling I order to avoid a default on the world’s sovereign debt of reference. Thirdly, even if the budget stalemate does persist, surely it just means the US Federal Reserve has to push its tapering of QE3 stimulus out further (supporting our delay theory, good for risk appetite given markets addiction to easy monetary policy) with the economy taking time just to get back to where it was pre-shutdown, never mid grow further.
Technically, the FTSE 100 index has traded in a narrow 100 point range this week (6385-6485). While identifying positives in the paragraph above, as a man of the charts I must point out that while we are off the week’s worst levels, yesterday’s lower high of 6,470 allows an interesting trend line to be drawn from the high of 6 Sept down through the gap down at the start of the week. This results in the hurdles at 6470 and 6485 as well as 6500, and so I’m looking for a break above 6,520 before considering the uptrend rekindled. Come on Washington, sort it out!
Big data this week included mixed Manufacturing PMIs, with China and Europe disappointing, the UK holding and US improving. However, Services PMI was on the whole more positive, even if the US saw a sharp drop back. In the absence of official US jobs data we had to make do with industry readings which showed less job creation than expected and cuts to last month’s reading. All good for the easy-money policy lovers and delayed-taper hopes. While US politics were interesting, Italy’s was a pantomime with media baron Berlusconi maintaining influence despite the prospect of prison.
With the FTSE 100 index -50pts for the week, big movers included Aviva (AV, +2.9%) and Prudential (PRU, +2.8%) not on stock-specific news, rather interest in solid yielding stocks exposed to emerging markets which are benefiting from the delayed taper call. Vodafone (VOD, +2.5%) gained ground despite its CFO resigning. William Hill (WMH, 2.2%) benefited from a broker upgrade (headwinds priced in) before a disappointing trading update, while Barclays (BARC, +2.1%) announced a strong uptake of its rights issue and traders attracted by broker upgrades and possible dividend hike next year.
As for those that struggled, Aggreko (AGK, -9.5%) was the victim of a broker downgrade on subdued demand for power projects. Fresnillo (FRES; -9.3%) still getting a hard time from precious metals failing to find demand as safe-havens despite uncertainty related to the US and a weaker USD making them cheaper. It had broker downgrades too. Index newbie Coca Cola Hellenic Bottling (CCH, -5.5%) struggled after making a technical break below rising support at 1840p. SABMiller (SAB, -4.9%) was dented by Unilever’s profits warning and blame attributed to emerging markets, as well as a broker downgrade. Kingfisher (KGF, -4.7%) suffered all week, continuing its weak trend since 10 Sept.
And so we enter another weekend with focus on US politicians. Can they release government employees from their hostage situation of unpaid leave and get on with reducing uncertainty on the US debt ceiling. I’m not too hopeful given the lack of progress already this week. Something by the end of next week would be nice. Until we get a big announcement stateside to give equities direction (be it up or down), and official US data resumes, markets likely to maintain steady sideways course. In the meantime, range-trading anyone? Enjoy.
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