Major Events of Last Week
Although the global equities succeeded in stemming their losses by staging a late rally last Friday, they still fell for the second consecutive week. Anxious investors are adopting a more risk aversive stance as the US government shutdown prepares to enter its second week. Despite plunging for the better part of the duration, the US major indices underwent a corrective bounce on Friday exemplified by the Dow Jones Index surging upwards by almost 78 points; the S&P 500 climbing by nearly 12 points and the NASDAQ ascending by 34 points.
With prospects increasing that the Washington deadlock could drag on for weeks, analysts are predicting that market volatility could soon begin to increase threatening the US economic recovery. They expect now that no compromise will be attained until the 17th October when the USA will hit its $16.7 debt ceiling limit. If a resolution is not found by then and the USA is forced to default on its debt obligations then the consequences for the global economy will be nothing more than devastating.
With the Republicans digging in deep, the US President has assertively advised that he will not bargain over health care reforms in order to reopen the government. Prominent economist are forecasting that if no deal is reached by the end of this coming week then the stakes will climb dramatically producing unknown damage to the US economy. They added that although the present closure is a serious problem, it still falls into insignificance compared to a potential US debt default.
Major political sources are already warning about the dire consequences that will evolve if such an unthinkable and unprecedented event was allowed to happen. For instance, the President of the Federal Reserve Bank of Atlanta, Dennis Lockhart, forcefully stated last Thursday that the shutdown has already damaged US growth prospects for the final quarter of 2013. In addition, the Bank of Japan informed the markets that an US debt impasse will generate major adverse repercussions for the global economic recovery.
Still, expert consensus anticipates that an agreement will be forthcoming within the imminent future that will stave off these nightmarish possibilities by generating a substantial market rally. Despite this optimism the impacts of the shutdown are presently building up. For instance, the publication of the highly important US non-farm payroll figure was delayed last Friday. Such developments are very significant because the US Federal Reserve depends on this key data to determine when it will start tapering its influential stimulus policies.
What to Expect This Week
One of the major events that occurred in Europe last week was an impressive victory achieved by the Italian Prime Minister, Enrico Letta, when he secured a key confidence vote in Parliament. The euro acquired immediate support from this event propelling it higher against most other major currencies. Letta will now have to focus on submitting a budget this week in order to comply with an October 15th deadline. He needs to include measures capable of reducing the Italian budget deficit from 2.9% to 1.8%, which will be no mean feat.
The Eurozone is not scheduled to publish any major economic indicators over the coming days. However, a spate of key committee members of the European Central Bank (ECB) will deliver important speeches this week. After Mario Draghi, the ECB President, did not place any emphasize on the strong EUR/USD last week, the single currency surge higher. Consequently, many analysts are expecting that the ECB speakers will attempt to correct this growing problem this week by talking down the euro. If this is so, then you can expect the single currency to weaken as this week unfolds.
Without question, the major dominating factor this week which will influence the global markets is the ongoing drama in Washington. For example, the closure is now having an increased impact on the US economy with over 800,000 employees laid off, Gross Domestic Product growth slumping by $15 billion weekly and major economic data releases cancelled. For instance, the US Labor and Commerce departments have stated that they will not be posting any reports until the shutdown ends.
Consequently, the publication of important economic indicators will be postponed if the US Congress fails to reach a compromise this week including the Trade Balance for August (Tuesday); Wholesales Inventories for August (Wednesday); import prices for September (Thursday) and the PPI, Retail Sales for September and Business Inventories for August (Friday). Irrespective of the status of the closure, the minutes from the last FOMC meeting in September will be issued on Wednesday. In addition, an important consumer confidence survey will be published by the University of Michigan on Friday.
However, all eyes will be on the US President, Barrack Obama, and the US Congress in order to ascertain how fast a resolution for the current crisis will be forthcoming. As most experts do not anticipate that these two parties are prepared to cause the USA to default on its debt obligations for the first time in its history, they assess this drama will be just temporary in nature. If a compromise is achieved shortly, then the relief will ignite rallies in both the global markets and the US Dollar.