Holidays Help Keep Markets Calm

The US dollar is little changed despite the apparent lack of progress in Washington to re-open the government and avoid default.    The markets seem to continue to view what is happening in Washington as drama and are still largely expecting a last minute deal.  

We also note that, contrary how it is often expressed, the US debt ceiling was hit several months ago and that what is at stake now is how long Treasury can find alternatives.  In that regard, there does not seem to be anything hard and fast about Oct 17.  

It is not just the foreign exchange market that has taken the weekend developments in stride.  Asian equities were mixed and notably China's shares advanced despite the unexpected decline in exports.    India's stock market also moved higher, despite the rise in inflation (WPI) to seven month highs, heightening speculation of another rate hike.  European bourses are mixed, with the Dow Jones Stoxx 600 off 0.1% near midday in London.  

The news stream in Europe is light.  The industrial production report offered a pleasant surprise.  It rose1.0% in August, a bit stronger than expected, while the July series was revised to show a 1.0% decline instead of the 1.5% fall initially reported.  However, on a work day adjusted basis is off 2.1% from a year ago compared to a revised 1.9% decline in July.  

The euro area finance minister are meeting today.   While the 1 bln euro tranche due from July is apparently on the table,  no decision on the 2014 funding gap is likely until next month.

Japan (and Hong Kong) markets were closed today.  China reported a slew of data following the weekend trade figures.  Consumer prices in August accelerated from 2.6% in July to 3.1% in August.  This reflected a sharp increase in food prices (6.1% from 4.7%).  Non-food prices rose 1.6% from 1.5%.  Separately, new yuan loans accelerated (the market had looked for a slower pace), though aggregate financing slowed to CNY1.4 trillion from CNY1.57 trillion.    

Lastly, we note that China's reserve accumulation has accelerated.  In Q3, they rose to $3.66 trillion from $3.496, a $164 bln increase after a $54 bln in increase in Q2.  The rub for China, regardless of the international monetary order, is where to put its surpluses.  The trade surplus in Q3 of $62 bln accounts for less than half of the reserve growth.  Although America's ability to shoot itself in the foot should not be under-estimated, there is simply no other market than can absorb the scale of China's surplus savings, given its desire to minimize the yuan's appreciation (it rose almost 0.3% in Q3).