With only two trading days to go on Wall Street before the debt deadline, it looks like Washington has decided on how to deal with their deficit and debt ceiling. Thankfully, US politicians chose to stop ignoring the market and the wealth destruction implications of their childish, unimpressive games on Capitol Hill.
And didn’t the market love it!
I have to say their counterparts in Canberra can be insensitive to the impact of their vacuous posturings and short-sighted policy decisions, but the Yanks do take the cake. Although European Union officials are pretty immature as well.
Winston Churchill got it right when he observed: “You can always count on Americans to do the right thing – after they’ve tried everything else.” It was these words that gave me comfort that a decision acceptable to both the House and the Senate would materialise before the deadline.
Last week’s standoff caused the New York Stock Exchange to suffer its worst week of the year, diving about 4% despite US company earnings coming in pretty sound. It wasn’t a bad effort on the earnings front given the fact the economy has hit a soft patch – thought to be a consequence of the Japanese disaster, a spike in oil prices and poor weather in the first half of this year.
Not helping was the weak reading on second quarter gross domestic product (GDP), which came in at 1.3%, below the 1.8% tipped. These results underline how irresponsible these clowns are in Congress.
And it got worse, with first quarter GDP revised down from the initial 1.9% to a scary 0.4%. The US economy needed the uncertainty of the political wrangling like a hole in the head.
The argument in Washington revolved around the size of the uplift in the $14.3 trillion debt ceiling and the timeframe of the deal, with the Democrats dead against a short-term agreement that could rekindle these arguments in the election campaign next year.
To understand the magnitude of what we were potentially facing, Credit Suisse calculates that a US default could result in a 30% stockmarket crash and a 5% drop in America’s GDP. Personally, I always argued that US politicians would not allow the country to default. Winston’s words kept me solid to that belief.
One final piece of good news came from Moody’s over the weekend, which says the likelihood of a US ratings downgrade still remains on the low side but once the new deal is passed, the ratings’ agencies’ reactions will be another focal point of anxiety for market players.
Fortunately, the expected deal will prevent more of this stupid horse trading before next year’s US election, which is due in November. This break could give the US economy a chance to grow without concerns of defaults, higher interest rates and possibly another recession.
That’s enough on the antics in Washington. Let’s focus on what happened over our weekend and what lies ahead this week.
Understandably, gold hit a record close at $US1,629 an ounce and the fear index, or VIX, inched higher. It now sits above 25 and while that’s higher than in recent weeks, it’s still considerably lower than the peak of almost 90 in 2008 during the global financial crisis. Fortunately, US consumer sentiment held at an expected 63.7 level, but the Chicago Purchase Managers Index was a tad lower than tipped, at 58.8.
The biggie ahead will be the ‘time bomb’ jobs report on Friday in the US. If it’s a shocker it could KO shares, but if it’s better than expected, hopefully hot on the heels of the expected debt deal being passed, we could be off to the races!
Any job creation near 50,000 or more would help investors remain positive but the consensus was talking up to 100,000, which looks like a tall order given recent growth numbers.
On the US company front, nearly 20% of S&P 500 companies will report this week and that will give us another good snapshot of corporate America. Thomson Reuters says 73% of the S&P 500 companies that have reported have beaten earnings estimates, and that’s a good omen.
The only significant negative out of corporate reporting has been the uncertainty generated by the debt debacle on company outlooks. This could end up being a reduced negative over time.
On the local scene, the Reserve Bank passes judgment on interest rates tomorrow and I hope they remain on the sidelines. Building approvals, retail figures and international trade data will also be out this week.
Last Friday we saw lending slump and house prices fall in all capital cities, yet some experts think it’s time to raise interest rates. The time will come, but it’s definitely not now!
Also in Monday’s Switzer Super Report:
- How to ride interest rates with floating rate notes [1]
- Draft tax rules have SMSFs up in arms [2]
- Why Leighton holds little growth potential [3]
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.