The US government shutdown remained a prime focus and this had an important impact in curbing overall activity, especially with a marked reluctance to take on aggressive positioning given the high degree of uncertainty and lack of economic reference points.
In this context, markets were also unsettled by the lack of US data releases. There was no US employment data on Friday with a further raft of data points postponed this week. There was also no update on the latest speculative positioning data from the CFTC which increased uncertainty surrounding potential market trends.
Contrary to some hopes on Friday, there was no US political breakthrough over the weekend. Speaker Boehner stated that there was no way that the Republican-controlled House would agree to raising the debt limit unless it includes conditions to rein in spending. He also refused to put a ‘clean’ spending bill before the house which maintained the impasse with the White House refusing to negotiate under duress.
There were increased concerns that brinkmanship will persist until at least the end of this week. The situation will become increasingly urgent with the Treasury insisted that the it will not be able to operate beyond October 17th without an increase in the debt ceiling.
Default is still seen as extremely unlikely, but markets are having to price-in some additional risk ahead of the deadline which hampered equity markets. The yen gained defensive support from the underlying uncertainty as USD/JPY dipped to test support below 97.00 with a low at 96.80.
There was a recovery in Nikkei future during the New York session which helped underpin risk conditions to some extent and USD/JPY was able to recover the 97 level.
The Wall Street Journal’s Hilsenrath reported that there were many members of the Federal Reserve uncomfortable with quantitative easing and are anxious to start the tapering process which provided some dollar support. The Euro was unable to regain the 1.36 level and drifted back to test support around 1.3550.
UK survey evidence remained strong with confidence in the financial-services sector at the highest since 2006 which provided some underlying support. GBP/USD found support close to the 1.6000 level and rallied to a peak near 1.6100 on an unwinding of over-sold conditions before drifting weaker again.