As expected it looks like US politicians have seen sense and agreed to reopen the Government and raise the US debt limit, but hold the champagne for now. It looks like the can has been kicked down the road with the battle to resume in the New Year. The framework agreed in the Senate would fund the government through to 15 January and raises the debt limit until 7 February.  Short term, the removal of the overhang has led to a nice bounce in global equity markets with the S&P 500 lifting 1.3% overnight and is now less than 1% away from its all time high.

Despite the drama in Washington, the global economy looks to be gathering steam with “green shoots” emerging not only in the US but also in Europe and China. Auto sales, a good indicator of consumer demand, have surprised on the upside in Europe in September rising at their fastest pace since 2011. Even in Spain where the economy has just emerged from a recession, car sales rose 22% year on year boosted by government backed discounts on vehicle trade-ins.  Earlier in the week, it was reported that Chinese passenger vehicle sales had risen 21% year on year in September.

The economic recovery looks to have legs with a global restocking cycle providing a lift to manufacturing activity, rising consumer confidence helping domestic consumption and businesses at the margin increasing capital expenditure.

The corporate sector in the US is in rude health with cash levels at all time highs, strong balance sheets and a huge ability to increase spending. However, the shenanigans in Washington have deterred much needed investment with companies preferring to reward investors through increased dividends and buybacks instead of investing for the long term.

Looking ahead, investors are likely to reward companies with higher valuations that have vision and invest in growth opportunities. A good example of this is Xero that recently raised NZ$180 million dollars at NZ$18.15 per share to continue with its US expansion. Since the capital raising on the 11th of October the stock has surged over 38%, quite remarkable given the performance of the stock going into the share issue.

Stephen Johnston

Senior Analyst, Global Markets