Markets Rebound After News of the US Debt Deal

News that the US government came to an agreement that reopens the federal government and averts the debt ceiling yesterday (Wednesday 16^th October), hours before the US was due to default on its debt payments to its international creditors, has been greeted with enthusiasm by Asian markets, as they all sees rises.

At the time of writing (Thursday 17^th October), the news had already filtered through to Asian Markets, the first to start trading since the US debt deal was passed by Congress, and as a result, the news saw share markets from Australia to Japan drive their indexes to the sort of levels not witnessed in weeks. As for specifics; MSCI’s broadest Asia-Pacific index outside of Japan rose to a fresh five month high, last being up 0.6%. Also after scaling a three week high recently Tokyo’s Nikkei rose 0.8%

However US stock futures dipped in a move that resembled a buy on rumour/sell on the fact move having already rallied around 1.3% overnight. Unusually European Markets such as London’s FTSE100 and Germany’s DAX are thought (at the time of writing) likely to open slightly lower, as experts are predicting that investors will be tempted to lock in profits gained last thing on Wednesday when news of the deal filtered through to European Markets.

The deal puts an end to the partial US government shutdown, which began on 1^st October when Republican controlled House of Representatives refused to broker a deal to extend US government funding in a bid to negotiate delaying or removing funding from the ‘Obamacare’ law, the law designed to provide some form of health care to every American, with the Democratic controlled Senate and President Obama. It also averted the US debt ceiling, which the country was due to hit today, which would have seen it default on its payments to holders of US debt, something that has never happened in US economic history. It would have been disastrous for the global financial sector, as the US is the world’s largest economy. It would have had a stunning knock on effect.

The deal, which sees the government funded until 15^th January, reopening the closed down departments as of today and raising the $16.7 trillion US debt ceiling was championed in a bipartisan effort by the Senate yesterday, which saw Democratic Majority Leader Harry Reid team up with his Republican counterpart to draft the initiative. The plan passed an 81 to 18 vote in the Senate, before being sent down for approval by the House. House Republican’s chose to concede defeat and many went along with the bill, with it passing the house 285 to 144 votes. However it must be noted that these are only temporary fixes. The problems are still there, and there’s a good chance we could see a repeat of this whole affair in early 2014.

At Castlestone Management we believe that these broader structural economic issues will continue long term. As industrialised nations continue to support their economies by printing money and holding interest rates low, gold and precious metals are exceptionally placed to begin another long term bull market.