U.S. Debt Ceiling Impasse Crushes Markets Globally
Australian shares have struggled this week as the reporting season gets underway with mixed results. The bad news from overseas regarding debt concerns simply does not let up. This week the sell-off came due to the impasse in Washington over the raising of the federal government’s $US14.3 trillion debt ceiling, leaving the U.S. vulnerable to a possible default or a credit downgrade from their triple-A credit rating. This could have disastrous impacts globally.
Investors moved to “risk-off” this week as the negotiations between Republicans, Democrats and the White House failed to reach a consensus as the deadline of August 2nd looms large. The markets have not factored in a U.S. default at this point and obviously expect some form of resolution by the deadline next week. The outcome next week will be critical for the performance of our markets near-term so expect a relief rally once the debt-ceiling is approved.
Commodity prices have continued to rise as the US dollar still struggles, with copper prices still around 10-week highs and the gold price at all-time highs.
U.S. stock markets have fallen this week and are on track for their worst weekly performance for over a year as the ongoing debt negotiations and threat of a credit downgrade have caused a sell-off.
The earnings season continues to beat estimates with 80 percent of the companies reporting beating earnings forecasts by an average of 15%, however investor focus remains on the debt ceiling issues.
The market is setting up for a relief rally once the debt ceiling issues are resolved, but there will be a problem if or when the credit rating is downgraded from AAA due to the ballooning debt. If the U.S. Government loses its AAA credit rating, this will have severe consequences, not the least of which will be increased borrowing costs, and will likely tarnish the view of the US dollar being seen as the world’s reserve currency.
Overnight the Dow Jones closed down -0.5% at 12,240, the S&P 500 index closed down -0.3% at 1,301, the Nasdaq ended flat at 2,766, and the smaller cap Russell 2000 was down -0.2%.
European stock markets have held up quite well following an agreement by the European leaders for a fresh financing package for Greece and avoiding contagion concerns in other debt-laden members of the euro zone. Traders cheered the European leaders agreeing to a new rescue for Greece that also includes a plan for private creditors to voluntarily exchange existing Greek bonds for new bonds that will mature far in the future. However the ratings agencies Moody’s Investors Service and Standard and Poors have kept the pressure on financials by cutting Greece’s debt rating further into junk territory, indicating that the planned debt swap would constitute a default. Banks across the region have come under heavy selling pressure in the course of the week as Goldman Sachs lowered its outlook for the sector.
Overnight in London the FTSE 100 index was up 0.3% at 5,873, the German DAX was down -0.9% at 7,190, while in France the CAC was down -0.6% at 3,712.
Asian stock markets have been generally weaker this week, as Chinese manufacturing data weighed on sentiment. The Chinese market plunged over 3% early in the week.
Asian markets have been under pressure due to increasing concerns over the U.S. debt ceiling impasse and the prospect of a credit downgrade or even a debt default. Across the region exporters suffered after a drop in U.S. durable-goods orders for June raised questions about future demand, while technology stocks followed their U.S. counterparts lower after some earnings misses.
Overnight in China, the SSE Composite was down -0.5% at 2,709, while in Hong Kong the Hang Seng Index was up 0.1% at 22,570 and in Japan the Nikkei 225 Index was down -1.5% at 9,901. The South Korean KOSPI was down -1.0% for the session, while the Indian market was down -1.2%.
Our View For Australia
The Australian share markets have been buffeted from the negative sentiment from overseas, particularly in the U.S. The S&P/ASX 200 index once again teetered on the key support level around 4450 and this will probably remain the case until the U.S. debt ceiling negotiations are resolved (next week). Our market needs to hold these levels, otherwise a test of the 4250 level could happen quickly.
Look for the market to test support around 4450, and if this can hold, expect another run at the key 4650 level. As stated last week the market needs to break above 4650 to confirm the double bottom which would be a setup for a move higher medium-term.
The U.S. impasse over the raising of their debt ceiling has proven to be the road block for global markets. The European leaders agreeing to the second bailout package for Greece was a positive but now we need a resolution to the U.S. debt crisis as the deadline of the 2nd of August looms large.
Our reporting season is underway, and a key take away will be how the miners are controlling their costs, given their unprecedented expansion of facilities in order to cope with the worldwide demand for resources. Banks are attractive on a yield basis and are again testing key support levels. Remember the dividend season is not far away and many blue chip stocks are cheap on a valuation basis, plus fund managers and investors alike are underweight equities.
The S&P/ASX 200 is currently trading at 4470 and is again testing pivotal support at 4450 near-term. Key levels for the index next week will be 4600 and 4350.
It is time to look for bargains in the market, especially if or when the U.S. debt ceiling issues are resolved.
By Michael Hevern
Head of Research
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