Political Uncertainty Deepens

The US President’s ambitious healthcare reform is turning out to be a major roadblock, as lawmakers pledged against raising the government’s spending limit until the reforms are put on the backburner for at least a year. The tussle has led to a scenario where the functioning of the government will be severely hampered from tomorrow. In Europe, fears of a renewed Italian political crisis have kept markets on the edge. At home, a string of positive housing data continues to cheer traders, though the possible threat of a looming housing bubble cannot be ruled out. This week promises to be pretty volatile, especially considering ominous political signals emanating from both sides of the Atlantic.

Pound Sterling – UK Markets

The BoE Governor, Mark Carney’s statement that there is no need to add further stimulus into the economy lifted the Pound against the majors on Friday. Meanwhile, alarm bells are ringing over the formation of a potential housing bubble at home following Prime Minister, David Cameron’s decision to implement the second phase of the government’s “Help to Buy” scheme three months in advance. The move comes at a time when house prices in the UK have shot up to multi-year highs. Data released over the weekend indicated that Hometrack house prices posted the largest monthly gain in six years for September. Also, a report just out has revealed a steady rise in UK mortgage approvals, raising further questions on the timing of the UK Prime Minister’s move. Sterling is trading on a stronger footing against the greenback and the Euro this morning following aggravating political developments in the US and Italy. Later today, the UK Chancellor, George Osborne’s speech will be eyed wherein he is expected to outline measures to improve the employment situation in Britain. Going forward, traders will keenly follow events unfolding across both sides of the Atlantic.

US Dollar – US Markets

The US Dollar weakened against its major counterparts on Friday amid looming concerns over US budget talks. In a further sign of the world’s largest economy hitting a possible roadblock, the Reuters/Michigan consumer sentiment index deteriorated to the lowest level since April 2013. However, personal spending and income rose in line with market estimates. In the aftermath of recent mixed economic data, a Fed policymaker opined that the central bank may extend QE3 measures until its January 2014 meeting. In today’s trading session, the greenback is trading firmer against the Euro, as concerns of the Italian political turmoil destabilising the entire Euro zone economy outweighed fears of an impending US government shutdown. Over the weekend, Republican lawmakers sought to delay the US President, Barack Obama’s healthcare reforms in lieu of an extension to the government’s spending limit until December 2013, thereby raising fears of a partial government shutdown starting tomorrow. While the US government’s efforts to shore up its spending woes will be keenly followed, the Chicago manufacturing index is likely to gain modest attention in today’s session. Also, non-farm payrolls data later this week will be eyed for hints on the Fed’s future policy decision.

Euro – European Markets

On Friday, the common currency moved higher against the US Dollar following mostly positive Euro zone sentiment indices data. However, it pared some of its gains in the latter half of the session amid threats of a pull out by the Italian government’s coalition partner. The development saw a rise in 10-year government bond yields at an auction. Meanwhile, Friday’s fears became a reality over the weekend, as Silvio Berlusconi pulled the plug and withdrew support to the coalition government, increasing the possibility of another snap election. The Italian Prime Minister is expected to go before Parliament on Wednesday for a confidence vote with the aim of avoiding early elections. Also, weak German retail sales data released earlier today weighed on the performance of the common currency. Later today, the Euro zone inflation report will be keenly followed for further insights into the region’s inflationary pressures and probability of the ECB resorting to further easing measures in the near future to boost growth. Looking ahead, developments in the US and Italy, as well as the ECB’s policy meeting due this week, will provide further hints to the Euro.

Other Currencies – Highlights

“Risk-off” sentiment prevailed in markets, as the New Zealand Dollar failed to gain traction against the US Dollar this morning, despite buoyant business sentiment data released earlier in the day which rose to the highest level since March 1999, led by higher profits from construction firms. Also, a sharp downward revision to the HSBC manufacturing PMI in China, New Zealand’s biggest export partner, further dampened demand for riskier assets, as traders chose to adopt a wait and watch approach. With little on the domestic economic calendar to trigger risk appetite during this week, market participants will keep an eye on developments in the US for further direction. The stand-off in the world’s largest economy on Barack Obama’s healthcare reforms and raising the government’s spending limit has threatened to put government operations in disarray from tomorrow.