Highlights for September:
The first was an imminent military strike on Syria by the US that would have unknown consequences for the markets. The second was the tapering of the monthly bond buying by the Fed that would result in the central bank switching from an easier stance to a lesser easier stance. Despite wide-spread expectations that both these lines would be crossed, neither ended up happening, leading to a sharp spike in volatility.
October will likely prove to be no less unpredictable…
We expect to have another very whippy month in front of us, as investors have lots to watch out for. The most pressing issue right now is the US government shutdown, one that is killing the US equity markets and leading to safe-haven buying in both bonds, and to a lesser extent, in gold. We should note that the last government shutdown lasted 21 days (from December 1995 until January 1996). At the time, President Clinton and House Speaker Newt Gingrich were fighting over spending and tax policy, but this time around, the dynamic is different in that conservative Republicans in the House are attempting to gain policy concessions on the healthcare law. For its part, the White House has refused to give any ground on what it sees as a program that is already legally in place and is demanding that spending restraints be lifted without preconditions. Bad as the government shutdown is, we think the markets will likely be more spooked by the approach of an October 17 deadline, which is when the U.S. Treasury expects that the country’s debt ceiling will be reached. The last time we had a “near-miss” on this issue before the politicians came around, S&P went ahead and promptly downgraded US debt. The Federal Reserve policy meeting also takes place at around the same time as the debt ceiling debate, bringing with it the usual guessing game as to what the central bank will do next.
Short-term outlook. Complicated, to say the least:
We have to believe (and hope) that the politicians in Washington will ultimately do the right thing and allow both government operations to resume while simultaneously raising the debt ceiling. Assuming agreements are reached on both the government shutdown and the removal of the debt ceiling, we think gold will be a casualty of any such accords, while the dollar will likely weaken as well. For the most part, base metals seem to be removed from all the Washington uncertainties, trading instead on the improved numbers coming out of China and therefore expected to remain stable going into October. We think the oil markets are poised to move lower the course of October on a combination of lessening Mid-East tensions and a surprisingly strong rebound in Libyan production. Weaker-looking chart patterns should also help the decline. We are expecting downward pressure on some of the agriculturals given the bearish fundamentals, coupled with the fact that the charts look quite poor in the case of corn and soybeans. We suspect that incremental selling in these two complexes could play a part in reversing wheat’s recent gains as well. In the tropical, sugar and cocoa will likely enjoy a degree of stabilization during the course of October on account of lower-than-expected surpluses (in the case of sugar) and an increasing deficit (for cocoa). Coffee seems to be finding no bottom, as supply continues to flood the market and despite all the talk, there seems to be very little inclination on the part of producers to cut back on output.
Finally, a few words on the upcoming Fed meeting; it seems to us that the central bank will likely stand pat again in October, perhaps not wanting to take two completely different directional views on rate policy in the span of just 30 days. However, even if the Fed stands aside, its decision may not deliver the same upside jolt to the equity markets that it did back in September, since the element of surprise will almost certainly be diluted.