Home > Uncategorized > 2011/08/01: ‘UNDERWHELMING’ RESPONSE TO U.S. DEBT DEAL


And there is not much of a surprise in that, due to two key factors that are either in flux, or will likely remain negative overall regardless of the immediate US Debt Ceiling Crisis being addressed. The first is the compromise that was crafted over the weekend is yet to be approved by the full US House and Senate. And there are no small number of dissenters on each side that might stretch out that process to a degree that still leaves the debt ceiling as a dilemma. However, even if that is settled for now (allowing it includes a rather critical contingency plan), the other factor remains whether solving any of these near-term crises (Europe included) amounts to anything that will actually rejuvenate the global economy.

As we have noted repeatedly of late, we are skeptical; and the economic data would seem to reinforce our view. It was obvious last week that there was a need to allow for a short term bear squeeze of some magnitude as and when (not if) the US debt ceiling is indeed increased at some point. However, at least so far it has not been enough to sustain September S&P 500 future back above the 1,310 support it had violated in the wake of a weak Beige Book last Wednesday

General Market Observations

While it has managed to hold nothing more than a temporary washout below more prominent 1,290-88 support on Friday (prior to Closing the week right in that area), that it has not even remain bid up in the 1,310 area looks pretty weak. While the ultimate test will be what happens as and when the final legislation is approved by Congress and signed by President Obama, what comes after any initial reaction is still far more important than the fact that the compromise has finally been approved. And whatever the equities decide is going to be a major impact on the other asset classes. If equities continue lower, it is likely that developed country government bonds (other than the problem children in Europe) continue higher in a perverse twist that defies the logic of lower government debt ratings.


Also as noted previous, the September S&P 500 future much below 1,290-88 would mean a return to the major 1,260-50 area supports is likely; even if we need to allow that there is a minor support at 1,280 (reinforced by the fact that the market managed to hold there on Friday.)

Other market tendencies also reinforce the degree to which the US Debt Deal is less than fully completed, and not necessarily an arbiter of US and global economic strength. Of course, the same can be said for the less than effective (even if substantial) moves by the powers-that-be in Europe. There is very little evidence from the markets at present that the ‘risk-on’ influence normally provided to the euro and energy markets and other commodities is back on track.

And in spite of the weakness in the European govvies now that they are not a ‘haven’ compared to fraught US, long dated government bonds and short money forwards are holding up very nicely today in spite of the near-term bear squeeze in the equities. That said, the government bond markets are closer than not to important resistances, like the September T-note future low 126-00 area, the September Gilt future upper 125.00 resistance, and September Bund future 131.00 area. What hangs in the balance on those resistance areas is whether the supposedly vulnerable govvies (due to all of the sovereign debt and fiscal concerns) are ready to push up yet another full point or more; which would be the implication of those resistances being violated.

Much the same can be said for the August Gold future, as it is backing off a bit after satisfying its test of 1,625 oscillator resistance. Any push above last week’s 1,635 all-time high would point toward an extension to at least 1,650, or even higher levels.

Thanks for your interest.

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