Recap: Week Ending October 11, 2013

October 13, 2013

For the first time in many weeks, all global equity markets followed my DeGroote MarketWatch closed higher! The positive close comes on the heels of news out of Washington DC that the debt ceiling talks are headed in the right direction. After pricing in what appeared to be a default by the US Federal Government, equities rallied hard. Buyers took control of the market and moved it to the upside, fast and aggressively. The strength of the buyers can be seen when the market closed on both Thursday and Friday at its daily highs. Despite gaining more than 300 points Thursday, the market continued to move higher Friday. The spike higher can be accredited mainly to a heavily oversold market. Hitting buy stocks, which push the market higher, can also take strong credit for the rapid move to the upside. It is believed by many traders that Goldman Sachs, a major US investment bank, had taken a core short position at the start of the week and the bulk of their buy stops were hit on the way up. Hitting Goldman buy stops would have triggered large buy orders in the market. Like US equities, the Toronto Stock Exchange, TSX, spiked higher on Thursday, but was unable to continue the upside as the US did Friday. Towards the end of the week a sell off in gold gained power to the downside, hampering any gaining the TSX may attempt to make. The German DAX bottomed the week on Wednesday, bouncing off its 50 day moving average. Currently the DAX is making a run at a multi year high which was made in mid September. Like the DAX, the UK’s FTSE bounced off its 50 day moving average to close on the highs for the week. The FTSE has really taken a hit compared to the DAX, sitting 5.5% below its yearly high.

Over the past week, news out of Washington regarding the debt ceiling has flip-flopped global markets. After a week of uncertainty about the situation in Washington, it finally appears politicians are on the right track to raising the debt ceiling. If the ceiling is not raised by this upcoming Thursday October 17, the US will default on interest payment to holders of its debt. A default according to many economists will be catastrophic to the world financial markets. Currently US debt is considered virtually riskless with various financial products prices in reference with it. If such a default occurs, the US credit rating will most likely be downgraded. The interesting fact that must be noted that was when the US narrowly avoided a default in the summer of 2011 US treasury prices rose, sending yields down. The price in prices comes despite a downgrade of the US credit trading. It is believed that the surge in buying can be attributed to the belief that US debt is still considered riskless, and will always be the haven play. A similar situation may play out over the course of the next few months as the debt ceiling issue passes through the bond market. Investors and traders must keep a close eye on the newswire as an event can come out of Washington at a moments notice. It will also be essential to watch gold as a possible haven if the bill to raise the ceiling gets pushed to the last minute, as many expect will happen.

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