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US Wins America’s Cup Amid Debt Ceiling Debate

Market Digest – Week Ending 9/27

Stocks fell amid concerns federal budget negotiations will lead to increased uncertainty and slower economic growth. The S&P finished down about 1%, snapping a three week winning streak. Ironically, bonds rose as investors sought a safe haven to park cash.

Weekly Returns:

S&P 500: 1,692 (-1.0%)
FTSE All-World ex-US: (-0.4%)
US 10 Year Treasury Yield: 2.62% (-0.11%)
Gold: $1,336 (+0.8%)
USD/EUR: $1.352 (+0.0%)

Major Events:

  • Monday – Blackberry announced a preliminary deal with one of its biggest shareholders to take the company private for about $4.7 billion,
  • Tuesday – Iranian President Hasan Rouhan refused to meet President Obama, slowing momentum for reduced tensions between the two countries.
  • Wednesday – Oracle Team USA capped an epic comeback to win the America’s Cup.
  • Wednesday – The Senate agreed to move forward with a multiday process to consider legislation to fund the government beyond Sept. 30, the end of the current fiscal year.
  • Thursday – Jobless claims came in at 305,000 which was less than expected.
  • Friday – The Senate voted to finance the government through Nov. 15, removing language to stop funding for Obamacare.
  • Friday – August core inflation rose 1.2%, about in line with expectations.

Our Take:

The Federal government is set to shut down on Tuesday if no budget agreement can be reached. On Friday, the Senate approved a resolution that would temporarily fund the government and passed it to the GOP controlled House.

Congress today is perhaps even more dysfunctional than usual, and bitterness runs high. The debt ceiling has been raised 74 times since 1962, and usually one could be confident it would be done so again in a timely manner. This time, however, it appears congress will take it down to the wire or even just past the wire. This is likely to cause additional volatility in the next few days but eventually should be resolved.

The real issue is not government shutdown, which already happened in 1996 with little long term impact, but the possibility of debt default. The government will cease to be able to pay its bills sometime next month unless the ceiling is raised. It is telling that government bonds actually increased in price this week even as some speculated they may suffer a default. Markets can sometimes be irrational, but this tells us there is little chance of an actual default.

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