11.10.13 Friday Morning

Global indices are broadly trading higher this morning from the week's open after Republicans moved to reassure market participants by making clear that they are considering signing on to a short-term increase in the government’s borrowing authority to buy time for negotiations on broader policy measures. What is still unclear however is how much time these early negotiations will buy. Early estimates fall anywhere between a few weeks to a few months.

Whilst any agreement would hopefully stave off a possible default, we are still left in a situation where the Democrats are refusing to negotiate with Republicans – citing anger over the 2011 budget standoff where Barack Obama felt “blackmailed” over the debt ceiling. Meanwhile Republicans are accusing Democrats of refusing to negotiate on matters they feel necessary, demanding concessions. The last budget negotiations ended in the first downgrade of U.S. debt.

The developments were the first sign that the President and House Republican leaders could resolve the fiscal impasse without negative economic consequences from a default as the halt in government operations moved into its 11th day. Any prospective deal faces many questions, including whether John Boehner can reach an agreement without losing the support of his members who are backed by the limited-government Tea Party. They’ve sought to use the debt ceiling and partial government shutdown to force curbs to Obamacare and federal spending cuts.

Still, a political breakdown that leads to a debt default carries greater risk over the long run for Obama than for the Republicans. An economic crisis that might tip the country back into recession would tarnish his presidency and the durability of his initiatives such as expanding health care to millions of uninsured Americans and pushing through the most sweeping changes in financial-market rules in seven decades.

The benchmark Standard & Poor’s 500 stock index has dropped 4 percent since hitting a high on Sept. 18 amid concern about the political stalemate in Washington, though it’s still up more than 16 percent since the beginning of the year. During the 2011 debt talks, the S&P 500 stock index fell 16.8 percent between July 22, when negotiations on a broad budget deal collapsed, and Aug 8, the first trading day after the government’s AAA debt was downgraded. The index didn’t recover to its July 22 level until February 2012.

The Bank of England policymakers met yesterday with expectations that the members would leave monetary policy unchanged. Despite further signs of economic strength - with the IMF revising its economic growth forecast to 1.4 percent this year and 1.9 percent for 2014 – the central bank did indeed decide to stick to its commitment to keep interest rates on hold while joblessness stays above the 7 percent target.

Unemployment currently stands at 7.7 percent, while consumer price inflation of 2.7 percent has exceeded the BoE's 2 percent target since December 2009 and is not forecast to be back on target until late 2015. Early analyst's estimates think a first rise in interest rates from their record-low 0.5 percent could come as soon as early 2015.

Going forward, fiscal impasse talks will dominate the headlines. Whilst yesterday’s discussions were labelled as “constructive” Republicans are still debating what policy conditions they would want to attach to a bill that would end the shutdown.

Significantly, Republicans seemed to be steering clear of the restrictions on Obama's healthcare reforms and spending that prompted the crisis in the first place. Instead, negotiations centred on how far to extend the debt limit and how much funding they would provide the government when it opens.

Stock of the Week:

Persimmon - Persimmon Plc (PSN) rose the most in almost two months after Goldman Sachs Group Inc. said the stock may increase by 70 percent within six months as it benefits from a housing recovery outside London. The U.K.’s largest homebuilder by market value climbed 5 percent to 1,131 pence in London trading, the biggest increase since Aug. 16. Goldman raised its price estimate for the stock by 2 percent to 1,854 pence.