It’s not a surprise to see the “mighty” dollar take it on the chin – a near term fiscal solution is not the correct answer. The temporary answer to end the US debt stalemate in Congress has pushed investors to focus on the economic impact of the partial government shutdown. The sixteen days of irresponsible politicking has dented investor and business confidence and has many guessing the growth prospects of the world’s largest economy for Q4 and for next year. The shaved estimates from GDP has the market somewhat believing that it would likely keep the Federal Reserve from withdrawing monetary stimulus at least until the beginning of next year. This will obviously mean everything will be dumped on the new Fed Chair’s watch. As such, U.S. Treasury yields have slipped and have managed to drag the dollar down against most major currencies, including the yen.
Those owning US debt maturing in 2013 can breath a tad easier. They are no longer worried about getting repaid. Yields on US short-term debt product (T-Bills) have completely erased the past two weeks rise. But all the market is technically doing is transferring risk to different date. The US funding deal now puts another set of T-Bills at risk, those maturing in early 2014. Overseas investors in particular will be wary about owning any US product in Q1 and part of Q2. The lack of confidence in Washington to do its job is currently being priced in for that period. If Washington does not get a bigger deal done, now that capital markets has brought into this short-term extension, the next fall out could be even more aggressive.
Uncertainty obviously has been extended and not resolved. There is now a new set of dates that investors are required to have penciled in their calendars. December 13th, the deadline for the House and Senate to reach a long-term budget agreement; January 15th, when temporary Government funding is expected to run out and finally February 7th, the date until which the debt ceiling has been suspended. Between now and February, and with a holiday season peppered in between, investors will once again remain extremely vigilant due to the “ambiguous” policy environment – this in itself will have many second guessing their investment decisions which could lead to a limited position taking environment where fundamentals take a back seat and volatility is driven by “weak” position taking.
By day’s end, all that has occurred is that US Congress gets a “second bite of the cherry,” and will again be holding US creditworthiness hostage until February 7th’s debt ceiling deadline. The past 16-day reality show drama has basically sent a reminder to the US’s largest creditors – China and Japan. Not just in terms of the US treasury holdings, but also in terms of economic growth. There probably was no ‘real’ fear of a US default, but Washington’s actions have damaged its overseas reputation, even more so that global economic growth is so tenuous. Japan was put on alert and is prepared to flood its financial markets with cash – “greasing the squeaky wheel.” China is expected to take a different approach – do not be surprised if they push harder for global acceptance of its currency as an alternative to the once “mighty” dollar in international trade. There were mention only last week, but the noise will become louder.
Providing market encouragement overnight is stronger data out of China. Its economy grew +7.8%, y/y, in Q3 of 2013, in line with the median forecast and accelerating from +7.5% in Q2. Even September’s industrial production (IP) was healthy, rising +10.2%, y/y, in line with market expectations. The disappointments came with retail sales and fixed-asset investments, both a tad weaker. The street now expects consecutive quarter growth to soften somewhat going forward following the strong summer activity. The Chinese government is likely to continue providing growth support when the annual growth rate slides towards 7%, but probably will slow such low key stimulus if growth is near 8%. Communist leaders are due to hold a key policy meeting next month and market will be interested in their take away of US fiscal fiasco.
Investors should expect this market to tread lightly. The mix of a temporary resolution and the recent Yellen nomination should be a plus for risk. However, riskier assets have not performed accordingly of late. Investors are expected to be gun shy at first and wait for more compelling economic data to be delivered before throwing their full enthusiasm into a trade. Under this scenario the market will be playing the contained range trade until they are utterly convinced somehow. Next week is the beginning of “catch up data,” starting with the granddaddy of fundamental data – non-farm payrolls next Tuesday.
Fiscal Deal: Dollar Bears The Brunt
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