Apparently, the US government ‘shutdown’ had very little effect of US equity prices, not because there is little risk to US economic health, but mainly because traders and investors were betting that any ‘shutdown’ would not only be partial, but also because it would be very short-lived. As a result, the S&P500 closed the week virtually unchanged. Volume was light to moderate. Interestingly, one major red flag was the jump in the VIX index which suggested that market participants were hedging their bets—while they believed the shutdown issue would be resolved quickly, they were busy taking out insurance (buying options that would pay off if S&P500 volatility spiked) just in case they were wrong.
Technically, last’s results have not changed the bearish pattern established on the S&P’s daily and weekly charts. And several market internals indicators continued to weaken, implying that the US equity markets are weakening in the short-term.
The macro news in the US last week was mixed, and the most important data—the payrolls report—was not released due to the partial government shutdown. The Chicago PMI report beat expectations, as did the Dallas Fed manufacturing survey. The PMI manufacturing index missed. ISM Manufacturing beat expectations. However, the ISM services index missed badly. But the entire payrolls report, as well as construction spending and factory orders were missing. Regardless, the bottom line on US economic growth continues to be unchanged—the US economy is barely growing. Instead, it’s flying barely above stall speed, barely above the ground. It is perilously close to entering another official recession.
So if the US government shutdown did not derail US equity markets, what about the next imminent threat—the US debt ceiling obstacle?
Unfortunately, for investors, this could present a bigger threat to risk asset prices. Bank of America analysts for example, just published a report in which they consider this, if it happens, to be comparable to the Lehman Brothers bankruptcy. Almost all analysts agree that should the debt ceiling not be raised, then the US Treasury will simply begin to delay payments to various parties, possibly even the Treasury Bill holders. The fact that T-Bill holders may not receive preferential treatment is reflected in the yield in the closest to maturity T-Bill, the 30 day Bill, which is jumping in yield. The fact that the 6 month or the 12 month T-Bills are not spiking in yield means that the markets are betting that any debt ceiling breach would be short lived.
So while the partial government continues to fester, the upcoming debt ceiling deadline—on October 17—bears close watching. This could finally precipitate some sort of meaningful sell-off in risk assets, which would allow intelligent investors to buy at a reduced price.
The next week and a half will be very interesting.