Markets prepare as debt ceiling deadline approaches

Overview and Observation; A deal may be in the works for resolving the government shutdown. Whether or not any offer by Republicans will be accepted by the Administration and the Senate remains to be seen. Unfortunately we doubt it. The stumbling blocks of increasing the debt ceiling without addressing the spending spree of the administration remain.

Markets have responded in the last few days as if a deal was imminent. We will necessarily be restrained from making any definitive market suggestions pending a resolution. Meanwhile with the U.S. government shutdown on the front burner, other elements that affect market action are left in question. The debt crisis currently experienced in Europe remains problematic to the financial markets. Now for some actual information for my readers and clients to absorb…

Interest Rates: The December 30-year Treasury bond (CBOT:ZBZ13) closed at 132 and 26/32nds, up 5/32nds on Friday. The University of Michigan/Thomson Reuters consumer sentiment index declined to 75.2 for October against 77.5 in September, the lowest reading since January.  A report by the Carlyle Group showed that the U.S. economy grew at only 1.7% in the third quarter. They also estimated that retail sales rose by 0.25% in September with consumer prices gaining 1.5% year on year. Fixed income markets have been subdued of late pending a resolution of the current government shutdown or on a worst case scenario basis, a U.S. default. I doubt very much if a default will occur because the damage to the credibility of the U.S. would be insurmountable. The debtor countries of Japan and China are a major concern to the financial markets internationally. Any default would cause the U.S. to pay much higher interest rates to borrow money, which at the rate of spending by the U.S. administration, is an absolute necessity. We remain neutral for now and holding our spreads in client accounts.

Stock Indexes: The Dow Jones industrials closed at 15,237.11, up 111.04 and for the week gained 1.09%. Enthusiasm over the possibility of a resolution to the current government shutdown is, in our opinion, premature but the markets seemed optimistic that a default can be avoided. An offer over the weekend by a Republican Senator was received well by some Democrats but Majority Leader Reid rejected the offer. It may, however, be the basis for an agreement later on. The S&P 500 (CME:SPZ13) closed at 1,703.20, up 10.64 and for the week gained 0.75%. The tech heavy Nasdaq closed at 3,791.97, up 31.12 but for the week lost 0.42%. We remain bearish for equities even as a short term sharp rally will occur should a deal be struck by Congress. That, in our opinion, would present an opportunity to either take profits, or short the market through the use of futures index options. Either way the implementation of strategic hedging programs is once again strongly suggested. 

Currencies: The December U.S. dollar (NYBOT:DXZ13) closed at 8046, on Friday, down 5.7 points but up against most currencies with the exception of the Euro which gained 18 points to close at $1.3558. The December Swiss Franc lost 10 points to $1.0979, the Japanese yen 34 points to $.10159, and the British Pound 19 points to $1.5961. The Canadian dollar gained 41 points to 96.44c and the Australian dollar gained 8 ticks to 94.27c. The ongoing U.S. government shutdown remains problematic to determining any appropriate position at this time.

About the Author
John Caiazzo

John has over 40 years experience at major U.S. Brokerage firms as Manager and Director of various International Divisions and is the founder of his own trading and brokerage firms. Over the years John has gained a wealth of knowledge and experience in all aspects of investments and trading. He was also a floor trader at the Commodity Exchange in New York. He formed Acuvest in 1999 and can be reached at futures@acuvest.com.

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