Standby for a big day on the Australian stockmarket and markets through Asia after a relief rally swept Wall Street overnight.
That was after a temporary deal to avoid next week’s debt default deadline emerged.
In true politician style, America seems to be about to ‘kick the debt ceiling can down the road’ until the end of the year, avoiding for now prospects of the default, and putting off all tough decisions, probably until December.
But without a permanent deal – and the latest suggestion hasn’t been approved by either President Obama or the hardline Tea Party members of the US Congress – the rally is based on relief that something is being done rather than seeing the 10 day impasse continue.
The news sent markets sharply higher. It was the best day since January 2 when the last great impasse – ‘the fiscal cliff’ – was averted.
Rather than make a permanent decision, the Tea Party dominated Republicans again refused to provide a permanent fix by okaying the budget and lifting the debt ceiling.
The Republican proposal has to be approved by the House where the Tea Party dominates. US media reports say it could be rejected by the hardline group in the House.
Worried markets shook off any doubts and jumped sharply – with the Dow, the Standard & Poor’s 500 and the Nasdaq all up by more than 2%.
The Dow jumped by well over 300 points and the S&P 500 had its strongest day since the start of the year.
Gold fell $US20 an ounce to $US1,286, oil rose and US bond yields jumped.
Markets in Europe all rose by between 1.4% in London and more than 2.3% in Spain.
The Aussie dollar jumped to around 94.60 US cents, after dipping under 94 cents earlier in the day after the weak September jobs report raised the odds (in traders’ minds) on a rate cut from the Reserve Bank.
Our market will open sharply higher today after jumping by around 70 points in futures trading overnight. That was after it finished slightly lower yesterday.
Other markets in Asia are also expected to rise strongly when trading resumes. Investors ignored the still indefinite nature of the deal – if there is a deal.
The reason for the market’s strong rise in the US was a move by Republicans in the House of Representatives to propose a temporary fix to the budget standoff, lessening the odds of a US default a week before the debt ceiling authority lapses.
The White House called the move encouraging and President Obama scheduled a meeting with House Republicans later this morning our time, and a further meeting with Senate Republicans tomorrow night, our time.
The news came after the Chinese government stepped up pressure on America to sort out the problem – China has around 60% of its $US3.5 trillion in foreign reserves in US dollars.
The Hong Kong Exchange and Clearing House increase the discount on US treasury securities that are used as collateral for deals.
Similar moves were being studied by a number of other markets, but not Australia where US Government debt is not used.
The shutdown of parts of the US government because of the lack of an approved budget saw a surge in the number of new requests for US unemployment benefits – up 66,000 last week to 374,000, the highest level for six months.
US Treasury Secretary Jack Lew pressed Congress for a long-term increase in the debt limit in testimony overnight before the Senate Finance Committee. But media reports said he told the Committee that Obama would accept a short-term extension.
In his testimony, Lew harshly rejected the idea of “prioritising” payments the government makes. That would just be “default by another name,” he said.
He reiterated that the deadline for raising the borrowing limit is October 17, when the government runs out of borrowing authority.
Retail sales and producer price data for September are due for release tonight our time, if the Government is back at work. If not they join the jobs report for last month as held back from release.
If a deal can be done, the government might not re-open until early next week.
Update Friday, 9.30 am: But mid-morning Friday, media reports from Washington said the possible Republican deal was rejected by President Obama, meaning that the big market rally could be aborted very quickly.
The New York Times reported that President Obama rejected the deal because it would not result in the reopening of the US government – shut for more than 10 days.
A group of 20 Republicans, led by House Speaker John Boehner, went to the White House at the President’s invitation to discuss their offer to increase the debt ceiling until November 22. In exchange, they wanted the president’s commitment to negotiate a deal for long-term deficit reduction and a tax overhaul.
Mr Boehner and his colleagues left after about an hour and a half without speaking to waiting media. But some Republicans later claimed the President was non-committal on the offer (which isn’t acceptance, though).
The Republican proposal could come to a vote as soon as Friday. But the White House and Congressional Democrats remained skeptical that House Republican leaders could pass the proposal because of the dominance of the hardline Conservative Tea Party Caucus in the house which scares Republicans.
The possible vote tonight, our time will probably keep investors interested across all markets during today. Some US reports that the chances of a deal happening in the next few days has increased because of the offer from the Republican leadership. They say an open vote in the House would support re-opening the government and extending the deadline – isolating the Tea Party group, but destroying Mr Boehner’s leadership.
