U.S. Markets Continue To Process The Combination Of Fiscal And Monetary Uncertainty

Includes: UDN, UUP
by: FXstreet

FXstreet.com (London) - When the FOMC made the decision to hold off on any tapering of its USD85 billion monthly asset purchases, it drove equity markets up to new highs on the prospect of continuing levels of liquidity injections. The decision also triggered a sharp drop in the dollar against the majority of its majors.

But since last week, the dollar has slowly strengthened, while the S&P has run out of steam, declining by 0.4 percent in a week. At the same time, Treasuries have continued to move lower, declining to August lows of 2.64 percent.

St. Louis Federal Reserve president and FOMC voting member James Bullard further muddied the waters last week when he hinted that a small tapering remains possible in October.

On the fiscal side of the coin, US direction faces similar uncertainty. At the time of writing, US Senator Ted Cruz remains on his feet having spoken through the night in protest against the Affordable Care Act.

Cruz has so far spoken for more than 17 hours ahead of a vote on a spending bill passed by the House that would provide a temporary extension of the US debt ceiling. While Cruz supports the clauses in the Act that would trigger a defunding of Obamacare, he is concerned about the ability of Democrats to then revert those changes and restore funding to President Obama's flagship policy.

While Cruz is almost certainly destined for failure, something that will concern markets is the rebelliousness of individual politicians. With the US government scheduled to hit its debt ceiling in mid-October, the ploy by Cruz, joined by fellow freshman senators Marco Rubio and Rand Paul will do little to reassure party leaders that a speedy resolution can be reached and that the debt ceiling can be raised from its current USD16.699 trillion.

Given that the last time that the US looked down the barrel of a government shutdown following a protracted debt ceiling partisan war, the US was downgraded from its AAA rating for the first time in its history, today's rebellion does not bode well.

Should debt ceiling confrontations continue, and Bullard's hinted-at October tapering become more likely, the dollar will come under pressure again, hand in hand with increasing Treasury yields.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.