Stocks Turn on Washington

The S&P 500 dropped to a four-week low on the continued deadlock in Washington. The FX market was surprisingly indifferent and Australian dollar was the best performer while CAD lagged. Up later are the BOJ minutes and Japanese machine tool orders.

The day was filled with political rhetoric but few signs of progress. The Senate will try to push through a clean debt ceiling hike later on Tuesday but Republicans will almost assuredly vote against it. Obama continued to say he will not negotiate on the budget or debt ceiling while Boehner insisted he only wants to negotiate.

The debt market is beginning to squirm. A 4-week T-bill sale was very weak and yields on the Oct 31 maturity moved up 12 basis points on fears the US won't pay. It's the first tangible sign of bond market worries.

Some Republicans are pushing the idea of prioritizing payments. That would help the bond market but would send the economy into recession if prolonged. A debt downgrade from Fitch is also an increasing possibility while Moody's has brushed off any risk to the US rating.

The stock market fell for the second day, taking out the long-term trendline from Nov 2011. The 100-dma, the Oct lows and the 61.8% retracement of the Sept rally also broke.

The market is finding it difficult to sell the US dollar because of its safe-haven status. Instead, economically-linked CAD is under pressure. In addition, Canadian trade data was soft. Unfortunately, US trade balance numbers were delayed due to the shutdown.

Minor economic data was released on consumer sentiment from IBD/TIPP and Gallop. Both showed dramatic declines in consumer confidence. That's probably an expression of frustration with Washington rather than chances in spending habits but it shows how frustrated the public is.

Looking ahead, USD/JPY made gains earlier on Japanese current account figures. The focus will remain on Japan with the BOJ minutes for the Sept 4-5 meeting at 2350 GMT and machine tool orders at 0600 GMT. However, the market will likely remain focused on the latest from Washington.