The Standard & Poor’s 500 Index soared 2.2% at 4 p.m. in New York for the biggest advance since January 2nd 2013. The Stoxx Europe 600 Index climbed 1.7% yesterday and the FTSE 100 climbed more than 1.5% yesterday and a further 0.6% as at 1400hrs today.
The reason for the rally was news emanating from the White House that they endorsed a short debt-limit increase with no policy conditions attached, signalling potential support for House Republicans’ plan for a month-long reprieve from a default.
House Speaker John Boehners plan would push the debt ceiling hurdle date for U.S. borrowing to Nov. 22 from Oct. 17, and would not end the 10-day old partial shutdown of the federal government. This ensures pressure is on to keep talking to find a total solution to this stupid politicking, which could be catastrophic.
A US Treasury Department report on October. 3 said consequences would be “catastrophic” should the U.S. default, including higher interest rates, lower investment and slow growth for decades to come.
A partial federal government shutdown lasting through the end of this week would pare 0.2 percentage point from U.S. economic growth and cost as much as 0.5 point if it continues another two weeks, according to the median estimate in a Bloomberg survey of economists.
At OCM we believe they will find a solution and agree a long term increase to the debt ceiling that keep both sides happy and takes us well beyond the mid term elections next year, because they have too. We are therefore seeing through this mist and concentrating on the three to six month outlook which is very positive, for equity and not debt whether it is corporate or government.
We evidence this bullish statement by looking at the corporate data, which is good; and getting better as we enter the third quarter earnings season, and add the fact that because the US shutdown is expected to dampen investor confidence, it will cause QE to be in play for longer. That will therefore allow further expansion in equity prices and optimism and reduce near term fear of QE stopping too early. That confidence and reasons to be cheerful will be pushed into the festive season and into the New Year.
Ground Hog day regarding QE and tapering in the US will return in the spring though and we will again start the whole cycle again of what next and can we cope but hopefully by then there will be no politicking or geo political events to destabilise what is an extremely positive resumption of forward looking optimism.
We at OCM therefore expect to see the equity rally continue as economic data continues to suggest we are globally coming to the end of a problem which started in 2007, with Northern Rock and a tightening in liquidity markets.
It is not over though, because there will always be something and we remain vigilant and watch closely to deliver Outcomes and protect capital.