Choppy Trade As Government Shutdown Continues

WHERE WE STAND – In a break from normal programming, I’ll start this morning with some good news from here in the UK.

The FTSE 100 printed fresh record highs yesterday, trading north of 9,400, bringing the YTD gain to 15%, or an even better 18.5% if one looks at things on a total return basis. While there are still three months of the year left to run, if things ended now, this would mark the London benchmark’s best year since all the way back in 2009.

Clearly, this is all rather positive and optimistic, two things that have been in very short supply here in Blighty in recent months. It must be said, though, that the FTSE’s advance is hardly reflective of any optimism around the domestic backdrop, not least considering that about 80% of the revenue generated by index constituents originates from outside the UK. Further reinforcing this view is the notable underperformance of the more domestically-focused midcap FTSE 250 this year, which trades just 6% higher YTD, reflective of the rather downbeat nature of the UK economy.

Still, the path of least resistance for the FTSE 100, at least, continues to lead to the upside, as the backdrop for equities across the globe remains a favourable one, risks to the pound tilt to the downside (boosting those overseas earnings) and, compared to global peers at least, the FTSE 100 still screens very cheap on a host of valuation metrics.

I write at such length about the London market not only to try and flip the conventional narrative a bit, but mainly to avoid having to write about the tedious pantomime of a US government shutdown for as long as possible.

Anyway, let’s bite the bullet. As frequent readers will know, my view is that this is all very much a ‘storm in a teacup’, a ‘mountain being made out of a molehill’, ‘much ado about nothing’, pick whatever metaphor pleases you most!

Whichever one you do pick, I implore market participants to continue to look through the political noise as much as possible; noise which, of course, will only grow louder in coming days. The government has shut down 20 times in the past, and re-opened 20 times as well – this time will not be different.

As such, I’ll admit to being surprised that stocks on Wall Street wobbled yesterday, and took a bit of a leg lower, even if the move was relatively modest in nature, and pared as the day went on. Clearly, sentiment wasn’t helped by last month’s ADP employment figures, which pointed not only to a surprise 32k decline in payrolls in September, but also to a 3k fall in employment in August. Despite the ADP report’s foibles, participants naturally placed more weight on the figures than usual this time out, given the likely lack of a BLS jobs report tomorrow. The ISM manufacturing data, meanwhile, was close enough to consensus not to bother worrying about.

In any case, my view remains that any equity dips on the back of ‘shutdown fears’ should be faded, with dips continuing to be viewed as buying opportunities, as the path of least resistance leads clearly to the upside amid a resilient underlying economy, solid earnings growth, and a looser monetary backdrop – with 25bp Fed cuts in October, and December, pretty much nailed on. There’s also the likelihood that, as Q4 progressed, FOMO (Fear Of Missing Out) turns into FOMU (Fear Of Materially Underperforming), spurring yet more equity demand.

Elsewhere, Treasuries rallied across the curve yesterday, led by the front-end, in a move that was largely a function of a dovish repricing of policy expectations on the back of that ADP data. Still, the curve as a whole steepened, and I remain of the view that the curve will continue to steepen amid the Fed’s ‘run it hot’ approach, and as the risk of inflation expectations un-anchoring continues to linger

That risk, of course, continues to support the bull case for precious metals too, with both gold and silver advancing once more yesterday. As is often the case, fresh highs are likely to beget yet more fresh highs here, with momentum still firmly with the bulls, and the fundamental case for further upside in PMs a solid one too, especially as DM fiscal spending continues on an unsustainable path.

LOOK AHEAD – What looks to be a light data docket lies in wait, especially with today’s US jobless claims and factory orders stats being postponed as a result of the ongoing government shutdown.

As a result, all there is for participants to do is to monitor headlines on that front, while also casting a cursory glance over the latest Swiss CPI and eurozone unemployment stats, even if neither is especially likely to ‘move the needle’ for the respective central banks.