Good morning. Almost followed the script yesterday but a little annoying that it just missed the optimum shorting level at 6471 before dropping. We got the little bounce and then more downside, but 6430ish has held twice as support now. Markets didn’t seem that fussed in the end with regards to the actual government shut down in the US, compared to the drop we saw when they were still negotiating. Looking at the charts and the failure of the S&P to get back above 1701 suggests still more bearishness to come (S&P hit 1698 and then fell back yesterday). The main issue that’s looming is of course the debt ceiling and the worry will be that the negotiations on 17th October will also end in deadlock, and that’s more worrying than a one day government shut down. We have been here before with debt ceiling talks and at the last minute agreement was reached. I expect it will similarly go down to the wire this time. If no agreement is reached then the US will be at risk of defaulting which will rattle markets quite a bit I would expect.
Asia Overnight from Bloomberg
Asian stocks outside Japan rose as investors speculated economic effects would be limited from the first partial U.S. government shutdown in 17 years. Japanese shares fell.
The MSCI Asia Pacific excluding Japan Index gained 0.5 percent to 463.09 as of 12:59 p.m. in Tokyo. The MSCI Asia Pacific Index that includes Japanese shares slipped 0.1 percent to 138.63. The U.S. government is in partial shutdown after lawmakers failed to agree on a federal budget. Congress also faces a dispute over raising the $16.7 trillion debt limit this month.
“People see this is a short-term impact, but the key question is around the debt ceiling and that’s what people are looking forward to,” said Chris Weston, chief market strategist at IG Markets Ltd. in Melbourne. “If you take away the U.S. fiscal position, then equity appreciation is still very strong.”
Japan’s Topix (TPX) index fell 1.1 percent after rising 0.5 percent. Prime Minister Shinzo Abe yesterday unveiled a 5 trillion yen ($51 billion) stimulus package to cushion the first sales-tax increase since 1997.
Shutdown Costs
Closing down parts of the government will cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc., with effects increasing if a prolonged impasse dents consumer and business confidence.
US Futures
Futures on the Standard & Poor’s 500 Index fell 0.1 percent today after the measure gained 0.8 percent yesterday. The U.S. government began its first partial shutdown in 17 years yesterday as Republicans and Democrats remained at odds over whether to tie any changes to the 2010 Affordable Care Act to a short-term extension of government funding. As many as 800,000 federal employees were out of work, while some services were halted.
Debt Ceiling
The U.S. has begun using the final extraordinary measures to avoid breaching the nation’s debt limit, Treasury Secretary Jacob J. Lew said as he urged Congress to increase borrowing authority “immediately.” Lew, in a letter addressed to House Speaker John Boehner dated today, repeated that the measures will be exhausted no later than Oct. 17. When that happens, “we will be left to meet our country’s commitments at that time with only approximately $30 billion,” he said, “far short of net expenditures on certain days, which can be as high as $60 billion.”
Lew and President Barack Obama have said they won’t negotiate on the limit, which is tied to obligations the U.S. has already incurred. Boehner, an Ohio Republican, has issued a list of demands before he’ll support raising the ceiling. His conditions include approval of TransCanada Corp. (TRP)’s Keystone XL pipeline, major revisions to the tax code and a one-year delay of the insurance mandate in the Obama health-care law.
FTSE Outlook
The bulls managed to defend the 6430 area mentioned yesterday as the level of support. If that breaks then 6400 is still viable. However, they haven’t been able to put a lot of distance between 6430 and where we currently are, and with the S&P looking likely for more downside they still have a job on their hands. I mentioned yesterday that I still expect one more low before a rise into the end of the year and I think that’s still the case. A low early November is what I am thinking. For that plan to be invalidated the bulls need prices above 6520 soon, and above 6600 for a breakout to the upside. 6600 is the top of the 20 day Raff channel. 6520 is the top of the 10 day Raff channel.
For today the EMAs on the 30 minute chart are bearish so I expect we will dip down to the ProTrend line at 6430 again initially. If, and it’s a big If, bulls can break the pivot at 6450 then we should test the top of the 30 minute channel at around 6485. What happens there is less clear though I am favouring downside. The 6485/95 area might offer up some resistance but if the rise is strong then it should test the top of the 10 day Raff at 6520 – and that would get a bigger drop. There is a bit of resistance at 6470 as well, (circled), though the blue arrows are my preferred plan. I have also plotted a couple of pink arrows in case those resistance levels mentioned hold.