Traders to focus on Washington on hopes for long-term debt deal, end to shutdown

TORONTO – Traders get back to work this week hoping that American lawmakers will come to a long-term agreement on dealing with the debt limit.

North American markets ended last week on a positive note, relieved that Democrats and Republicans were at least talking to each other about heading off a Thursday deadline that would see the U.S. run out of room on its debt limit and possibly spark a default.

The S&P/TSX composite index ended the week up 1.04 per cent, while the Dow industrials rose 1.09 per cent.

Those gains were netted in the final two sessions of last week after Republican speaker John Boehner said the GOP was willing to bring forward legislation to extend the debt ceiling for another six weeks to Nov. 22. The offer was conditional on President Barack Obama agreeing to negotiate on spending cuts and the partial U.S. government shutdown.

But building on those gains this week will be difficult in the absence of a longer term agreement.

“How much farther can we go knowing that we’re going through all this again in six to eight weeks?,” asked Colin Cieszynski, a market analyst at CMC Markets Canada.Do

“If they’re going to have to do this again before the end of the year, then you could get a quick rally, but you may not be able to get very far. You have people saying: ‘Fine and nice, OK, we’re not going to blow up today, we’re going to blow up tomorrow.'”

Ending the partial government shutdown, which started Oct. 1, has been a secondary priority. But that doesn’t mean that traders aren’t cognizant of the damage being caused to the economy by the lack of a funding agreement.

“You get past a couple of weeks, you do start to see cumulative effects,” said Bob Gorman, chief portfolio strategist at TD Waterhouse, who observed that, in broad terms, the U.S. gross domestic product dips 0.3 per cent every week the shutdown goes on.

“It’s what I would call the qualitative and the quantitative. The quantitative stuff is the things that you can readily measure. But the qualitative is more in terms of confidence and I think you can see that starting to gnaw away at things even now.”

There will be some welcome distraction from Washington politics this week.

The third quarter earnings season gains momentum in the U.S. with IBM and Google posting results.

Gorman noted that IBM has had a couple of mediocre quarters as the company transitions from hardware to consulting and software.

“Which, in itself, has been fine but the overall business has not been expanding (so) you have some underlying concerns there,” he said.

He added that markets are looking for a fairly strong report from Google on Thursday.

Gorman said that analysts will be watching to see how Google has done with its gradual gain in overall ad lines, as well as mobile ad lineage.

Traders will also get a fresh look at the economic health of the world’s second-largest economy.

China is reporting trade, inflation and gross domestic data during the week.

Chinese data often has a marked effect on the resource-heavy TSX as positive data have driven up commodity prices and sent share prices higher for energy and mining companies.