Futures in the United States are rising, while those in Europe are falling as Germany gives its final verdict on its newly elected Chancellor. Germany is a European powerhouse, and whatever occurs there has a huge impact on investors in the rest of Europe. In general, equity markets throughout the world have shrugged off concerns about a hawkish Fed, the Evergrande conundrum, and China’s recent clampdown on cryptocurrencies. However, investors should proceed with caution because the coronavirus remains a major risk to global financial markets.
Despite the chaotic trading experienced last week, the major indices managed to close in the green. The Dow Jones Industrial Average snapped its three-week losing streak last week, rising 0.60%. Similarly, the S&P 500 index increased by 0.50%, while the Nasdaq, the tech-savvy index, increased by 0.02%.
Investors should note that August orders for US Durable Goods are set to be revealed today. Investors will be using this report to understand what economic activity is likely to look like in the short term. Orders are predicted to rise 0.6%, compared to the 0.1% decline in July.
Furthermore, a major challenge that the Biden administration is facing now is finding a way for the government to do good on its short-term commitments. Stock traders are watching what lawmakers are doing to avoid a default in government-issued debt and a potential meltdown regarding President Biden’s economic plans.
Investors should understand that the U.S. treasury could very likely fail to timely meet its payments due unless Congress intervenes to raise the government’s borrowing limit or at least suspends it. Time to act on this issue is running out with each passing day as Democrats and Republicans are in a standoff over disagreements related to the Biden Administration’s spending agenda.
Failure to act appropriately and in a timely manner could very well cast doubt on the government’s ability to raise capital in the future, as investors would fear default, which would prompt investors to call the United States’ credit and full faith into question. Similarly, if the Treasury is unable to issue new debt in order to raise funds, the government will almost certainly be unable to pay social security recipients, bondholders, and veterans. A default of this magnitude will almost certainly cause havoc in financial markets.
According to Treasury Secretary Janet Yellen, historically, debt limit face-offs, like those in 2011 and 2013, have shown that waiting till the last minute can have an adverse impact on consumer and business confidence, negatively affect credit ratings, and increase short-term borrowing costs for Americans. As a result, a delay that causes investors to doubt the US Treasury’s stamp, indicating that payment is guaranteed by the US, will send shockwaves through financial markets in the U.S. and across the world.
The two parties are at odds because the Republicans want the Democrats to include an increment in the debt ceiling in their budget reconciliation package. However, Democrats are insisting that Republicans be included in this agreement because the bill does not allow for additional spending for Democrats but rather covers spending that has already been authorised by both parties. Currently, the Treasury is using emergency measures to meet the government’s obligations, but these measures are expected to expire in October.
Traders have been bearish on the EUR/USD currency pair amid elections in Germany. The pair has been hovering around 1.1720 after the centre-left Social Democrats (SPD) defeated Angela Merkel’s Christian Democratic Union. Although a coalition government will likely be formed, the shift in power is dragging hopes for swift and sustainable economic recovery down.
Beijing has declared that dealing in cryptocurrencies will be illegal in the future. The news had a significant impact on cryptocurrency market sentiment, resulting in a sell-off. China has tightened regulations in recent months, including increased regulatory oversight of cryptocurrency exchanges and mining. However, investors should understand that Beijing’s enhanced clampdown does not imply that it does not see the benefits of the blockchain space but rather that it is attempting to regulate the sector and lay the groundwork for its own digital Yuan. The country wishes to exert control over the revolution and shape it to fit Beijing’s long-term vision.
Brent, the crude oil benchmark, is expected to break the $80 mark as supply tightens and demand rises. OPEC countries’ struggles to meet production targets due to poor maintenance during coronavirus lockdowns and hindrances in the Gulf of Mexico are major drivers of the growing demand-supply gap. On the other hand, as economies recover from the coronavirus pandemic, demand for oil continues to rise, and with the recent increase in gas prices, demand for oil is expected to rise even further as we approach the winter months.
Gold prices have risen after China’s Evergrande failed to make a payment on offshore bonds, with additional payments due this week. Because of the uncertainty surrounding this situation, investors have migrated to gold. However, gold’s gains resisted a rise in 10-year Treasury bond yields after the Fed hinted at commencing the withdrawal of its massive stimulus programme in November. A rise in treasury yields raises the opportunity cost of holding gold, causing investors to shift to other forms of investment.
Along with the Evergrande case, China is now facing a shortage of power supply as all of the country’s provinces have missed their production targets. As of 01.00 a.m. EST, the Nikkei declined 0.10%, while the Shanghai Composite Index dropped 1.30%. Seoul’s Kospi jumped 0.13%. The ASX 200 index hopped 0.68%, and the Hang Seng index, in Hong Kong, rose 0.28%.