The Overnight Report: Catastrophe Postponed

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By Greg Peel

The Dow rose 205 points or 1.4% while the S&P gained 1.4% to 1721 and the Nasdaq added 1.1%.

Last night the US Treasury auctioned US$20bn of one-month T-bills without difficulty. Demand was registered at 4.33 times the amount, up from 2.75 times last week. The settlement yield was 0.24%, down from 0.36% last week.

The auction was concluded in a cloud of uncertainty as to whether the US government could actually honour the paper. Therein lies a deal of irony. It might be a fair call to suggest Congress would never be foolish enough to allow the US to default, but does that mean it’s prudent to keep lending the US money? The world has been shaking its head this past two weeks, and America’s reputation as a Safe House has taken a battering, but the fact remains no one much sees an alternative. Not even the Chinese. The Chinese have been whinging on the one hand throughout the shutdown debacle, and lending the US ever more on the other.

It seems we might have a deal. Wall Street is obviously confident. We are not talking any form of resolution, just an agreement to buy time. Sometime this morning the Senate will pass a bill reopening the US government until January 15 and extending the debt ceiling through to February 7. It is then expected a sufficient number of Republicans will support the bill’s passage through the House. Have a good Christmas everyone, because we’re going to do this all again in the New Year.

Early this year it was the Fiscal Cliff. Early next year it’s more of shutdown/ceiling romp. President Obama, so far, has won a Pyrrhic victory. He has not budged on Obamacare, and Obamacare remains intact. He has agreed to negotiations on other means of debt reduction, with regard to entitlement and tax reform for example, but then he was always prepared to do that anyway. He may have only bought time, but it is the Republicans who have backed down. Outside a few remaining cretins, it has become clear enough to the Republicans that were the US to default, it would not be the Democrats America and the world would blame.

So crisis averted, possibly. We still need to see the vote confirmed. If so, the next step is to assess the damage.

Fundamental to Wall Street’s positive response to likely default avoidance, and note that last night the S&P 500 closed at 1721, a whole four points below September 18’s all-time closing high of 1725, is the assumption the Fed will not dare commence any reduction in QE until the fiscal issue is settled. This means tapering will not be considered until at least March, most now believe. Imagine if Bernanke had come out last month and said “We have no intention of tapering until at least March next year”. Wall Street would have flown to the moon. Bernanke, who was derided for apparently misleading markets, is now being hailed as a seer.

Nevertheless, the US government has been shut down for sixteen days. That in itself will trim fourth quarter GDP, before the knock-on effects are considered. A major victim will be confidence. How can US consumers and businesses (and we can extend that globally) feel confident to borrow and spend if a US default has not been averted but merely postponed for four months, potentially?

Then there’s US fourth quarter earnings. We are only at the very beginning of the third quarter result season, and so far results have been fine. But the market is now more focussed on fourth quarter guidance. If US companies use the shutdown as an excuse to slash fourth quarter forecasts, then we won’t be looking at fresh highs on Wall Street. Black & Decker did exactly that last night, and its shares fell 14%.

Last night’s release of the NAHB’s housing market sentiment index showed a fall to a four-month low of 55, down from 57 last month. Rising mortgage rates (tapering fear) and the shutdown/ceiling debacle were blamed. The Fed Beige Book of anecdotal economic assessments across all Fed regions showed the same “modest to moderate” growth of the past few months. But mention was made of the shutdown (which was one week in when the Book was ruled off) and its potential impact.

Across other markets, the mood was one of wait, watch and hope. The US bond market receded from default fear, with the ten-year yield falling 5bps to 2.67%, but the US dollar index is steady at 80.51. Gold is steady at US$1280.00/oz. The Aussie (safe haven?) is 0.4% stronger at US$0.9550.

Base metals are little moved, outside of lead which is up 1%. Oil went with the stock market, with Brent rising US$1.16 to US$110.68/bbl (on the new December delivery front month) and West Texas rising US$1.09 to US$102.30/bbl.

Spot iron ore rose US10c to US$133.70/t.

Yesterday Bridge Street stalled, electing to back ultimate sanity rather then follow Wall Street’s jitters. The SPI Overnight closed up 20 points or 0.4%.

Tonight in the US may see a reopened government, but it’s not likely scheduled industrial production and housing start numbers will be released. The Philadelphia Fed will nevertheless release its manufacturing index.

Beforehand, NAB will release its September quarter summary of business confidence locally today. Apologies for yesterday when I erroneously suggested BHP Billiton ((BHP)) was to release its production report. That date is actually next Tuesday. My source has been taken out and shot. I am, however, confident Fortescue Metals ((FMG)), Newcrest Mining ((NCM)) and Woodside Petroleum ((WPL)) will release their production reports today, and Ten Network ((TEN)) will announce its full-year result.

Rudi will appear on Sky Business at noon today, at which time we assume he can discuss a postponement bill just passed. Note Rudi will also appear on Friday's Your Money, Your Call – Bonds versus Equities.
 

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