US equity markets appeared to be heading toward meltdown mode this week until the first signs of a breakthrough in the Washington budget battle changed sentiment.
Equity markets posted deep losses through midweek on the ongoing partial government shutdown and bleak commentary on the effects of a potential US debt default.
However, the market’s mood lifted suddenly on Thursday morning, when US House of Representatives Speaker John Boehner signaled support for a temporary extension of US borrowing authority, prompting the Dow Jones Industrial Average to notch its second-largest percentage gain of the year.
The good cheer extended into Friday, enabling two of the three leading indices to post weekly gains. The Dow jumped 164.53 (1.09 percent) to finish at 15,237.11, while the broad-based S&P 500 tacked on 12.70 (0.75 percent) to close at 1,703.20 and the tech-rich NASDAQ Composite Index dropped 15.88 (0.42 percent) to 3,791.87.
There was still no deal by the close of business on Friday, but investors, figuring the global economy had dodged a bullet, were still in a giddy mood.
“It seems like all’s good on Wall Street,” BNY Convergex trader Anthony Conroy said. “Everybody’s pricing in that we’ll have some sort of agreement.”
“Yesterday was like the best day of the year and today is a good, strong follow-on,” Greg Peterson, director of investment research at Ballentine Partners, said on Friday.
The US budget debate loomed large over the week, dominating some other significant events.
Early quarterly earnings reports came from aluminum producer Alcoa Inc and banking giants Wells Fargo & Co and JPMorgan Chase, which posted its first quarterly loss in nearly a decade after taking a US$9.15 billion charge for legal expenses following a series of recent high-profile regulatory problems.
JPMorgan said its underlying performance remained strong despite the messy litigation, although mediocre lending levels in some key customer areas continued to suggest a tepid economic recovery.
JPMorgan chief executive Jamie Dimon predicted Washington would meet its deadline to raise the debt ceiling, suggesting that the alternative outcome was unthinkable.
“The country cannot have a debt default,” Dimon said.
US President Barack Obama made history by tapping US Federal Reserve Vice Chairwoman Janet Yellen to be the first woman to lead the US central bank. Yellen, who is regarded as “dovish” on inflation, signaled she would not break with the US central bank’s current easy-money policies aimed at pushing down unemployment, still high at 7.3 percent in August.
Until the Washington shutdown drama took hold, Wall Street’s top preoccupation was determining when the Fed would scale back its US$85 billion-a-month bond-buying program. Yellen’s appointment likely shifts the timeframe for the taper until next year, analysts said.
Also this week, the IMF cut its global economic growth forecast for the year by 0.3 percent to 2.9 percent and next year’s by 0.2 percent to 3.6 percent.
The report came ahead of the annual meetings between the IMF and the World Bank. Yet again, the proceedings were shadowed by concerns about the US fiscal situation, especially a potential debt default.
“It’s an issue that concerns all of us,” Chilean Minister of Finance Felipe Larrain said. “It is a US problem, but ultimately it can kill the recovery of this economy and have a strong impact on the rest of the world.”
The shutdown has pushed back releases of key economic data recently, including the monthly jobs report and retail sales. More delays are expected in the coming week, although the Fed is scheduled to release its Beige Book of economic indicators and the Conference Board Inc is also set to release its report on leading economic indicators.
The busy earnings calendar includes reports from leading technology companies, including Google Inc and Intel Corp, and top banks, such as Citigroup Inc and Dow component Goldman Sachs.
Still, analysts expect the focus to remain on budget talks. While stocks ended the week smiling, there could be more bumps ahead. The current proposal pushes the time-frame to the end of next month.
“There’s still a lot of work to be done,” Peterson said. “So I’m sure there’s going to be more volatility.”