DISASTER AVOIDED MOMENTARILY Debt ceiling decision deferred

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The calendar for raising the debt ceiling has been momentarily avoided. A joint agreement between Trump, the GOP and Democrats has been avoided for the moment. However, this does not mean we are out of the woods. The debt ceiling will be deferred until December 15, which is just before the midterm elections. Politically, this could be a very astute move by Trump or a very silly move. If the Democrats can paint the Trump administration and the GOP as profligate spenders and need to be reined in, then the debt ceiling stoush in December could turn out to be a disaster for Trump and the GOP, if the GOP lose the majority. For the Democrats, they will need to be on their game and make every post a winner. This is a potentially high stakes gambit.

Aid is required for Texas and may soon be required for Florida if Irma maintains its current strength and trajectory. Certainly, Harvey has affected the U.S. economy and Irma, if it hits the U.S. could have an even larger effect. In the meantime, markets are looking to December and are adjusting for a showdown. Certainly t-bills have adjusted and the market has demonstrated that move unequivocally.

 

Trump was speaking today in North Dakota where he was expected to announce a tax policy. Other than suggesting that taxes were too high and complicated and that the code required rewriting not a lot else was said nor detail released about Mnuchin/Cohn tax policy.

Stanley Fischer is set to step down from the Fed. This departure and the possible departure of Yellen would allow Trump to reshape the Fed. Blankfein has already suggested that his former CFO at Goldman’s, Cohn, would make a good Chairman. To date, Trump would be considering a possible new Chair, a Deputy Chairman and two Governors.  Trump’s appointments will affect how the Fed addresses key economic issues. These subtle issues to be addressed are the link between unemployment and inflation, and productivity.

The markets took the debt ceiling news in a positive manner with equities rallying and bonds suffering a mild selloff. However, the party may be far from over with Trump telling Kim that he won’t tolerate North Korea’s actions. I am not sure what Trump can do on this other than hollow bellicose threats. If Trump were to do the improbable action, then geopolitical risk will rise significantly. I don’t believe those around Trump would allow Trump to take any action. The stakes are too high and Kim knows that. And Trump won’t jeopardise $500 bio of trade with China.

The big talking points though for the remainder of the week will be Draghi’s address today and if there is any mention of tapering by the ECB. The other will be who will replace the respected Stanley Fischer and how Trump will change the composition of the Fed.

Recap.

Equities: rallied after initially weakening. The temporary relief on the debt ceiling signalled a reverse of fortunes and the equity market rallied and bonds sold off a little. The Dow gained 0.25%, the S&P 500 gained 0.31%. The big disappointment on the day was that once again when Trump was to talk about tax policy because there was no detail rather reasons why the tax code should be changed.

Currencies: the Bloomberg Dollar Spot Index fell0.1%, the loonie surged 1.2% after the Bank of Canada raised rates. The euro was steady and the pound was slightly stronger up 0.1%.

Commodities: Gold fell 0.4% as risk was taken off the table. WTI rose 1% as Asian traders looked to purchase U.S. crude ahead of Irma and after several refineries were closed in the U.S. in the wake of Harvey. Gasoline may well see a rally in the coming days. China is lending Guinea $20 billion to secure aluminium ore. The loan to the west African country is for twenty years.

Bonds are reacting to the debt ceiling and to market events. Draghi’s comments Thursday may be seen as the future direction for the ECB. The market will react according to the strength of Draghi’s comments and if the ECB is likely to be scaling back monetary stimulus. The composition of the Fed will be a talking point as Trump can now reshape the manner and how the Fed acts. Bonds on the day weakened marginally. The U.S. 10-year weakened 4 bp to close at 2.10% and the 30-year closed at 2.72%. The curve steepened about 3.3 bp with the 2/10 closing at 79.9 a widening of 3.3bp, 2/30 widened 2.9bp to close at 141.60bp and the 10/30 closed at 61.6 a slight tightening of 0.4bp. European rates were steady.

Aussie Market Today.

The main danger of the debt ceiling has now been averted and bonds softened about 4 bp.  Thus, this could lead to a slight weakening of bonds in the Aussie market today. Moreover, equities should rally. As always of late, geopolitical tensions could rise if North Korea were to launch another missile or if Trump’s comments towards North Korea lead to a reaction by the reclusive Government.

On the day, however, I expect bonds to soften a little and for equities to rally.

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