Be wary of the coming deal on US budget, debt impasse – it will mislead
The US budget and debt ceiling impasse has been setting the tune for markets globally for the past fortnight, and yesterday and last night was no difference, but with the added flavour of weak data from China on exports and inflation.
Markets in Asia and Europe were mostly firmer on hopes of a deal (but not Australia) while Wall Street started weakly, falling 101 points at the start, then rising, retreating slightly and then ending higher, but cautious about a deal that would end the growing crisis.
Gold and oil were higher and the Aussie dollar edged to within sight of 95 US cents as the greenback weakened.
Hopes of a settlement to the two disputes have firmed and could come sometime today after a day of talks in Washington between Democrat and Republican senators.
President Obama has scheduled a meeting to discuss progress at 7 am today, our time, but this was postponed to allow more discussions to take place.
A deal will spark a big relief rally on global markets, but that’s about all it will be.
We will then see markets resume concentrating on the Fed’s tapering schedule and the third quarter earnings reports.
A deal that gets the government refunded and the debt ceiling lifted and extended will also see some key economic data released, such as unemployment and US payrolls and retail sales.
In fact any deal that involves cuts to government spending will see the Fed maintain its current $US85 billion a month of spending for longer than it seemed a month ago.
But that’s in the (hopefully) not too distant future. Most investors overnight worried about the pace of talks in Washington and worries about China, because of the weaker than expect export performance in September and higher consumer inflation costs.
Chinese consumer inflation was up 3.1% in September compared with the 2.6% rate in August.
That got some analysts worried. But the rise came from higher vegetable costs which could easily fall in the immediate future.
Chinese producer prices again fell, but the pace of decline continues to ease – they were down an annual 1.3% last month, better than the 1.6% in August. That tells us more Chinese industry is felling the positive impact of the rebound.
The 3.1% rise in consumer price inflation would have been closer to August’s 2.6% rate if not for a 6.1% jump in food prices in the month.
These fears about the Chinese economy were misplaced because the more you drilled down into the data, the more it seems as though the economy is doing nicely with key imports up strongly, car sales stronger and inflation boosted by higher food prices.
The Australian market was down more than 36 points at one stage yesterday instead of being up more than 30 points, as signalled by share price futures.
The ASX 200 ended down 23 points at 5,207.9. The All Ordinaries index was down 22.3 points, or 0.4%, at 5,206.5.
Japan and Hong Kong were closed for a holiday, but the Chinese market rose.
With much of America closed for a holiday overnight, third quarter earnings reports resume tonight our time, with companies such as Citigroup Inc., Coca-Cola Co. and Intel reporting.
