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By David Morrison  |  22/01/2018 16:53
”USgovernmentshutdown”/ This article looks at stock indices and the EURUSD in the light of recent political events

US government shutdown ignored

Monday marked day three of the US government shutdown. This weekend the Senate was unable to agree to a House-approved temporary funding bill, which would have kept the government going until 16th February. There continue to be disagreements over immigration and a children’s Health Insurance Programme although a fresh attempt to push through a deal is set for later this afternoon.

For now, investors are taking the issue in their stride. This is in line with market behaviour during similar occasions, the last being in 2013 when the shutdown lasted for sixteen days. Essential government services should be unaffected by the shutdown, although Federal employees at national parks, monuments, libraries, museums and the like have been told to stay at home. As far as Wall Street is concerned, activity at regulators such as the SEC and CFTC is curtailed and there’s a possibility that some economic data won’t be released as scheduled.

Officially such stoppages mean employees are unpaid. However, in the past any shortfalls have been made up at a later date. The problem will come if the impasse continues through until March as this is when the debt ceiling has to be raised. A failure to do so would technically trigger a default on US government debt – something that is unthinkable and which could have profound consequences. Anyway, that’s not something that anyone’s bothered about currently, which can be seen clearly from market behaviour.

Stock index rally continues

Early indications suggested that US stock indices were set for a modest pull-back. At one stage the Dow Jones was called to open around 100 points lower. However, all the majors pushed back into positive territory soon after the open. Halliburton (HAL) was up over 3.5% after the oilfield services provider reported fourth quarter results. Earnings per share came in at $0.53 against $0.46 expected on revenues of $5.9 billion compared with $4.0 billion for the same quarter last year. The conglomerate continues to get a boost from the pick-up in US shale production as crude prices rally. But it was the tech-heavy NASDAQ which was showing the biggest gains going into the European close. It was lifted by Netflix which rose 2.6% ahead of its earnings report due after the bell. The move helped to push both the NASDAQ and S&P500 to fresh all-time highs.

Certainly, there’s no evidence investors are even close to reducing their exposure to risk assets. However, questions are being asked about just how much longer this US-led rally in equities can continue. There are growing concerns that there has been no significant pull-back in the major indices for years now, and only a small amount of consolidation. The last time there was a 5% sell-off in the S&P500 was after the UK referendum on membership of the European Union, eighteen months ago. Meanwhile, we haven’t seen a 10% correction in the S&P500 since early 2016. As we look ahead to tighter monetary policy from the developed world central banks, there’s a fear that a policy misstep could trigger a melt-down with none of the usual firebreaks that a few corrective sell-offs would have provided.
 
 FX

There was another potentially market-moving political event over the weekend. German Chancellor Angela Merkel was offered a lifeline and the promise of a working government after her SPD opponents voted in favour of entering in to formal coalition talks. The news helped to keep a bid under the euro although the single currency already has plenty of upside momentum having taken out technical resistance less than a fortnight ago. This was when the EURUSD surged above its September 2017 high which came in just below 1.2100. Since then it has traded through 1.2300 to hit its highest level in over three years. The big question now is if it can build on these gains this week. However, that may prove to be difficult ahead of a monetary policy meeting from the European Central Bank (ECB) on Thursday. Investors will be paying close attention to ECB President Mario Draghi during his subsequent press conference. The hope is that he may reveal the Governing Council’s thinking on the timing of future reductions in the ECB’s Asset Purchase Programme (APP). However, Mr Draghi has a history of insisting that such monetary stimulus be open-ended, reserving the right to increase it in either size or duration as required by financial/economic conditions. 

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