The TSX registered a small gain while New York lost ground last week as traders worried about the economic damage that would result if Congress fails to pass a funding bill to keep the U.S. government operating after Oct. 1, when its new fiscal year starts. Also, the U.S. borrowing limit needs to be raised before Oct. 17.
The gridlock brought back memories of August 2011, when Democrats and Republicans locked horns over raising the debt limit.
Along with the potential of a stalled an economy still recovering from the 2008 crash, indexes were hard hit then as traders worried about a possible default. And Standard & Poor's ended up downgrading the U.S. credit rating before a political compromise was reached.
But analysts point out that the financial world is, thankfully, much better positioned to weather shocks two years later.
"In 2011, we were still climbing out of the abyss," said Andrew Pyle, senior wealth adviser and portfolio manager at ScotiaMcLeod in Peterborough, Ont.
"In 2013 there is momentum being created in a lot of parts of the economy, so the economy is in a different situation. . . . Therefore the risk to the economy is less simply because there’s probably more resiliency to handle this kind of nonsense than there was literally a year and a half into recovery mode."
At the same time, Pyle thinks U.S. indexes, which have dramatically outshone the resource-heavy TSX this year, are looking vulnerable to selling pressure.
"That’s the thing that I’m cautious about — this can be used to trigger or to motivate selling in the absence of any other negative issues," he said.
"You could take this item and say, this is a reason why I better take some money off the table before we get into year-end because I have had such a great year."
Even with last week's dip, the Dow industrials is still up 16.5 per cent for the year, while the TSX is ahead a much more modest three per cent.
Traders are trying to look past the budget gridlock to what the U.S. Federal Reserve may decide to do in October about a key economic stimulus plan. The Fed surprised markets after its September interest rate meeting by not announcing that it would start to taper its US$85 billion in monthly bond purchases, a move that has kept long-term rates low and encouraged a rally on many stock markets this year.
The Fed has made it clear it would only start to trim those asset purchases if it thought the American economy was strong enough and a reason cited for the Fed postponing was worry about how the budget battle would impact growth.
"If part of this decision to not taper was hinged on things not looking as good as the (Fed) needed them to look like,coming out of August, then we are in major data-watching mode for the next four weeks starting with Friday’s U.S. non-farm payrolls report," said Pyle.
"And unless these numbers come in absolutely stellar (job creation well above 200,000), the market is going to put the tapering back into the December (Fed) meeting."
The consensus calls for American job creation to come in at 180,000 for September after the economy cranked out 169,000 in August.
The major Canadian economic report this week is the July reading on economic growth. Statistics Canada was expected to report that gross domestic product grew by 0.5 per cent after dipping a similar amount in June, largely due to severe floods in Alberta and a strike in the Quebec construction sector.
"Gains in manufacturing, wholesale and retail activity erased much of the losses from the prior month," said BMO Capital Markets senior economist Benjamin Reitzes in a commentary.
A 0.5 per cent gain in GDP "would leave the third quarter on track to hit our forecast for two per cent annualized growth."Suggest a correction