Börse & Märkte

Markets Drop On US and Italy Political Drama

Equities suffering, US stock futures deteriorate – Italy’s FTSE MIB tanks with banks leading the losses while Italian 10-year bond yields shoot up. Gold and safe haven core government bonds in favour in response to the risk-off tone across financial markets this Monday. A number of driving forces at play; increased likelihood of a US government shutdown by midnight tonight as US lawmakers remain deeply divided on a number of issues, particularly Obamacare.

 

Political drama in Italy after Silvio Berlusconi pulled five ministers from the five-month old grand coalition government, putting pressure on PM Letta who is now looking for a vote of confidence in order to form a fresh grand coalition. On top of all that, the final PMI manufacturing reading out of China wasn’t as impressive as suggested in the previous estimate, Japanese industrial output and retail sales data were disappointing and the fact that we are seeing some month-end profit taking as investors gear up for what could be a highly risky October.

 

So, over the weekend, US lawmakers failed to avert what now looks to be a shutdown of the US government, which, if is not resolved soon, could drag on US economic growth at an extremely fragile time. Goldman Sachs reckon a two-day shutdown equals 0.1 percentage points shaved off from US GDP whilst a one-week shutdown could knock off 0.3% from GDP. What’s more, is if this becomes a protracted affair, there’s a possibility the US could default which will bring out the rating agencies ready with their knives to chop the sovereign’s rating. In fact, Moody’s reckons 4Q GDP could be reduced as much as 1.4% if there is a three-to-four week shutdown.

 

Now, at a time when economic growth is fragile at best, the market is now working out the implications of what the economic impact could be on Q4 growth. Not always easy to measure something like this as talks between lawmakers continues but what is fast accepted in the market is that tapering by the Fed may be held off for this year. Fed head Bernanke will not fire the tapering trigger until the fiscal situation is under control which could take longer than he and the markets had anticipated. Looking ahead, Chicago PMIs will garner some attention.