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Investors finally showed some nervousness Tuesday towards the ongoing fiscal wrangling in Washington, as the partial government shutdown drags on into a second week and the debt ceiling deadline is looming large, eroding market confidence.
Analysts said although the likelihood of a default is remote, the U.S. equity market will continue to trend lower and nervousness will hang over the market until bipartisan lawmakers in Congress can struck a deal to break the current stalemate.
Steady selloff, not capitulation
U.S. stocks took a pound on the eighth day of the government shutdown following Monday' s plunge, with major stock indices dropping to one-month lows.
The Dow Jones Industrial Average dropped 1.07 percent to 14,776.53 points. The Standard & Poor's 500-stock Index plunged 1.23 percent to 1,655.45 points. The Nasdaq Composite Index plummeted 2.00 percent to 3,694.83 points.
"It is selling off on light volume. That tells us there is no buyer stepping in,"Alan Valdes, director of floor operations at DME Securities, told Xinhua Tuesday.
Kenneth Polcari, director of New York Stock Exchange Floor Operations at O'Neil Securities, said what' s interesting is"there is no capitulation. You don' t have people running for the doors. You have kind of this steady selloff over the last couple of days."
Fiscal gridlock induces fears
"There is no panic, but that doesn' t mean people aren' t nervous,"Polcari said, noting that"the market is selling off because the complete lack of clarity, corporation, or compromise down in (Washington) D.C."
"It' s all about (Washington) D.C. at the moment. It' s all about the public fight that' s taking place on the world stage. It' s not anything to do with economic fundamentals. It' s all about fears both sides are building over not only the government shutdown but the pending debt ceiling,"he added.
The CBOE Volatility Index jumped to 20.34 on Tuesday, a level not seen since late June.
"If they were panic, you' d see the VIX really spike. And if this continues to drag out, you may see the VIX move higher and higher as a result. But right now, it' s kind of an orderly repricing of assets based on what the market, what investors think the risk is now,"Polcari said.
The market has broken a bunch of critical levels. The broad-based S&P 500 has lost its 50-day moving average, which was a big support level of the index. And the Dow has dropped below the psychologically important level of 15,000 points.
More importantly, Thomson Reuters data showed the one-month U.S. Treasury bill rate climbed above the fixing on the one-month London interbank offered rate, namely Libor, for the first time in at least 12 years.
"All these signs are showing a weak economy. Traders are nervous. When traders are nervous, they don' t buy,"Valdes said.
Bearish in short term
Billionaire investor Warren Buffett warned last week that"it (debt fight) should be like nuclear bombs: too horrible to use."
Traders believe that as the debt ceiling deadline draws closer, fiscal fight in Washington will continue to weigh on the market and investors'fears will remain.
"I suspect if we continue to be down this road with no one talking to each other, the market will continue to show displeasure and will move lower,"said Polcari.
Despite growing concerns over a possible debt default, global ratings agency Moody' s Investors Service said in a report released Monday that"We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact."
Valdes said"I don' t think we will default. But that said, if you have money tied up, why not take it out?"The U.S. stock market has posted impressive gains since the start of this year,"so why not just take your money out, play safe, and stand on the sideline,"he added.
Bank of America Merrill Lynch economists said Tuesday in a note that they currently assume"the shutdown lasts for two weeks and subtracts 0.5 ppt (percentage point) from 4Q GDP growth. We would not expect a significant sell-off in stocks under this scenario."
Traders also agree that once the fiscal deadlock is resolved, the market will bounce back.
Kenneth said:"In the end, I think they will come together and they will raise the ceiling. Once they do, once that' s off the table, then the market will start to perform better, because this market actually is not a commentary necessarily on the economy at this point, (but) truly a commentary on the dysfunction in Washington."
Valdes predicted that the market will be higher than it is today when it comes to Dec. 31.
