Home > Uncategorized > 2011/08/02: Markets Ignore US Debt Limit Hike? OR… Do They Know What It Means?

2011/08/02: Markets Ignore US Debt Limit Hike? OR… Do They Know What It Means?

In spite of the degree to which the shenanigans in Washington DC regarding the fiscal situation and US government debt ceiling are perceived to be critical for the government bond markets and equities, the most important recent development is the degree to which the consensus on the future path of the global economy has become far more negative of late. We have been very confident that this was indeed the case, due to the rapidly developing economies’ overt attempt to tackle their inflation problem.

Now added to that is the continuing fiscal retrenchment in Europe that is part of the (seemingly not very successful) attempt to address the peripheral European Debt-Dilemma. Of course, all of that was only reinforced significantly early last month with the release of the most recent OECD Composite Leading Indicators (CLI for May due to their two-month delay). Going from speaking of sustained growth three months ago (i.e. for March), and indicating only a mild loss of growth momentum two month’s ago, last month’s headline noted a “…slowdown in most major economies.” You can still access that at http://bit.ly/n4Xvuv.

They note that even ostensibly still strong  economies are at an inflection point which might lead to a downturn in the  cycle. The further consideration there is that the  indication for the US  was barely topping; more so a “potential turning point” (i.e. DOWN  from UP) they noted. However, that was before the US debt ceiling and fiscal debate had put forth more concrete forms of near-term and extended spending cuts. Considering all of the other government spending cuts (which includes those at the state and city level, not just federal government) as well as consumers rebuilding their balance sheets, there  just doesn’t seem to be a lot there that would speak of any rationale for a more upbeat US or global economy anytime soon.

General Market Observations

And it would seem that is the reality that is dawning on the equity markets, as it has been and (to the degree it is  reinforced by the near-term economic data) will continue to be the driver for further  stock market weakness; and the commensurate response in other asset  classes. As we have noted for some time (and increasingly since the OECD July  CLI reinforced our general instincts), all of the weak data brings into question whether the address of the US Debt Ceiling Dilemma and peripheral Euro-zone Debt Dilemma is a basis for assuming there will be a return to more robust global economic growth after a ‘soft patch’ (as many would like to believe.) Both the current economic data and reliable forecast revisions seem to indicate that the softness in the global economy is more likely an overall phase.

There has been more news on that since yesterday’s weak Manufacturing Purchasing Managers Indices, as Australian Building Approvals were much weaker than expected, along with the figures for both US Personal Income and Consumption. While today’s US Senate vote on the Debt-Limit Bill will certainly be important, presuming that goes as planned it is possible markets will be able to revert back to more meaningful focus on the economic data and central bank influences. Given the situation in Europe is still in disarray, we suspect the major focus will be Thursday’s ECB press conference and Friday’s US Employment report.

EXTENDED TREND IMPLICATIONS

While it has been extremely volatile, in broad terms the September S&P 500 future remains range bound after its failure from the 1,351 Tolerance of potential topping activity after the last US Employment report. Recently back up near it, the market was critical once again, and the weakness back below 1,327 and 1,310 (tellingly after last week’s Federal Reserve Beige Book release) are significantly bearish signs. Recent slippage also swinging below Its UP Break (out of its overall DOWN channel from the early-May high) at the 1,290-88 area congestion support remains the more telling intermediate-term negative signal, yet with the market already having dropped near its major support back in the 1,260-50 area (with a Tolerance to 1,244.)

While there have been some distortions due to the vagaries of the peripheral Euro-Debt Dilemma and US fiscal and Debt Ceiling Dilemma, developed economies’ government bond markets have managed to thrive in that weakening equities environment, as  expected. And we expect more of the same as the underlying weakness of the global economic situation becomes more apparent. And in this case that has actually occurred prior to the end of that classical boost to both sentiment and equities prices from the end of corporate earnings announcement season. In general though it has been a typical short-term seasonal cycle, with govvies winning the debate after exhibiting a ‘hostage to fortune’ rally (i.e. anticipating equities would weaken as earnings season progressed.) For more on the trend specifics, see yesterday’s analysis. For more on the seasonal govvies ‘hostage to fortune’ rallies, see our May 4th extended post on that topic.

All the rest remains pretty much as previous, as the US Dollar Index churns up against its .7450 recent DOWN  Break after holding mid-.7300 support; the Swiss franc continues to be an upside runaway along with the continued strong UP trend in August Gold future that has seen only a slight pullback from resistance in the 1,630 area, much above which oscillator resistances are every $20 higher; and Crude Oil remains under the influence of the equities, yet range bound for now pending a Close out of the 100.00 area to 95.50-94.40 range.

Thanks for your interest.

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  1. USIKPA
    August 2, 2011 at 5:05 PM

    Thank you for this analysis.

    You say that the “…most important recent development is the degree to which the consensus on the future path of the global economy has become far more negative of late”

    If so, why brent oil and copper are basically unchanged from their recent highs?

    • August 3, 2011 at 1:41 PM

      Hi USIKPA-
      Good to hear from you and very good question… hearks back to why the Crude Oil was up at 140 shortly before the US economy was about to implode in 2008? There are always leads and lags, and the rationale behind them is a fascinating sidebar to the major cyclical trends.

      In this case I think those two might be the ultimate hideout for the commodity bulls who still count on the rapidly developing economies leading the way back UP sometime soon.

      But they (markets and investors alike) will need to pay the piper if China is on as weak a path as some perceive at the same time as the developed economies. See the July 11 OECD CLI release (indicators for May) on the extent of the downturn in various countries… Most interesting.

      • USIKPA
        August 3, 2011 at 3:53 PM

        Thank you for the reply and the link. Awaiting August 8 and 9th!

  2. Christopher Maytum
    August 3, 2011 at 7:08 PM

    Good to have you back, you old blogger!! Two things that financial journalists both here and in the late lamented colony appear unable to grasp and explain: the mathematics of increasing the DC overdraft to 16 trillion and cutting DC expenditure by approx 200 bn per annum for ten years and, thereby balancing the budget, and; Who would give a **** what the rating agencies do or say, with regard to sovereign credits, when it should be clear to any sane person that their analysis has been, at best, slipshod?? xxxxxxx

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