Friday, October 18, 2013

Weekly Market Update: Stocks Charge Higher After US Debt Stalemate Ends with a Whimper

-  The United State Congress managed not to let the country default on its debts this week, passing a bill to reopen the government and to raise the debt ceiling for a few months. After two weeks of a government shutdown, the Congressional bluster quieted and a backroom deal was reached just ahead of the Treasury's October 17th debt ceiling deadline.

-  All in all, the impact of the shutdown is expected to be fleeting, though S&P suggests it cost the United States $24 billion in economic activity, and will shave about 0.6% off of Q4 GDP, not to mention sacrificing a significant but intangible amount of the country's international standing.

-  In response to Washington's brinkmanship, Fitch put its AAA US rating on watch negative and Chinese agency Dagong cut its US rating to A- from A, while investor Warren Buffett labeled the debt limit a "political weapon of mass destruction." The GOP and the Congress garnered record-low approval ratings.

-  Meanwhile earnings season rolled on, with 75% of the S&P500 companies that reported this week meeting or beating consensus expectations. Very weak showings at Goldman Sachs and IBM hampered the DJIA, while the S&P500 closed out the week at new all-time highs and the Nasdaq pushed to within 100 points of the 4000 handle. For the week, the DJIA gained 1%, the S&P500 rose 2.4% and the Nasdaq surged 3.2%.

-  Fed hawks Fisher and George offered contrasting opinions about the potential for tapering QE. Fisher said he does not expect QE bond buying to be reduced at the October FOMC meeting, warning that markets were too delicate at the moment to begin the taper. Fisher also said that personally he would not consider tapering a good idea in October due to the current fiscal standoff. Meanwhile George said the Fed should begin tapering QE now, while also cautioning that the time is not yet right for tightening rate policy.

-  Crude Oil continued its extended its six-week decline, closing out the week just above the $100 handle. In Geneva, the P5+1 group of western powers plus Russia concluded a very positive two-day round of talks with Iran, and agreed to meet again on November 7-8th in order to keep talking. Newly elected Iranian President Rohani continued to make conciliatory statements, and the majors powers were cautiously optimistic about the change in tone, but cautioned that they were a long way from a breakthrough.

-  The dollar remained weak against the euro even after the end of the debt ceiling standoff. EUR/USD spiked up to the 1.3700 level late in the week, testing the January highs. There was plenty of snarky commentary out of the usual sources questioning the reserve currency status of the dollar, aiding the euro, the dollar's only realistic reserve currency alternative. ECB officials continue to soft-peddle the stability of the euro, however some admit they need to begin factoring in FX issue to the ECB inflation outlook.

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