The US government has until 17 October to determine a new debt ceiling (Photo: Reuters)
High hopes of a settlement in Washington allowed markets by the end of last week to recover the warm glow that only the Federal Reserve's asset purchase programme bestows.
Moreover, the unexpectedly early bonus of Janet Yellen's nomination has raised expectations that Ben Bernanke will leave tapering for her to start no earlier than mid-March next year.
This could mean that there will be up to $500bn (£313bn, €369bn) more liquidity than many investors had feared as recently as the middle of September.
That news together with an encouraging start to the Q3 earnings cycle should help to offset at least some of the disappointment that the poker game is continuing in Washington. Monday is the Columbus Day holiday for the federal government, which of course is already shut, and the banks but the stock market will be open.
With 17 October looming, as the day beyond which Treasury Secretary Lew has said he cannot be sure of paying all the government's bills, the absence of any signs of a deal by then could unnerve some investors.
There are a number of bill and note auctions to get through before the end of month T-Bill interest is due.
While Lew has protested that his department cannot differentiate the payments it has to make we can be sure that there will be no default yet. It will get a lot trickier in November if the poker game is still in session.
Accordingly, the outlook for US equities next week is unsettled but with the underlying assumption that a deal is imminent and the prospect of a rally, if it does.
Most other equity markets are likely to follow suit with emerging markets benefitting most from the felicitous prospect of an accommodative Bernanke Fed seamlessly changing into a dovish Yellen Fed.
One note of caution, however, is that the minutes of the September FOMC meeting show widening differences of opinion over the taper.
US Treasuries have remained pretty calm considering the poker play in Washington and yields may even ease by a few pips once it is concluded. Again, other bond markets are likely to follow suit.
The dollar faces further losses against emerging market currencies and may also give up some of last week's modest but still somewhat surprising gains against the majors. Another surprise in view of the dollar's fragility has been gold's retreat, which may be partially reversed with the prospect of several more months of quantitative easing.
The Week Ahead
In the UK, the MPC has closed ranks and seems to be winning the argument over the timing of interest rate rises.
Apart from the RICS survey on house prices, last week's data was rather disappointing if not downright puzzling in the case of Industrial Production and Manufacturing Output.
This week should get off to a controversial start with the CPI stubbornly stuck above 2.5%, thereby giving ammunition to Ed Miliband who appears to be smelling blood. He had better check his facts, however, as food and oil are the main culprits and not gas and electricity prices while keeping the lights is economically much more important. The Employment, Retail Sales and Public Borrowing should be solid or better and this might give UK equities a fillip.
The mood in the City seems to be improving by the week.
The Trade data from China was quite soft but easier to understand than the buoyant export figures in recent months, which have been very puzzling. A not so new concern for the authorities is that inflation is picking up again.
Quarterly and monthly growth indicators are due out on Friday and is likely to be flat at best.
China is not going to save the global economy on its own. Not this year, at least.
Meanwhile in Europe it looks like another week in the 'waiting room' as Angela Merkel circles her prey.
She really must be tempted to go it alone and use the threat of fresh elections (her opinion poll ratings get better and better) to keep the opposition docile. Last week's EMU data was grim again, apart from Germany's Industrial Production, boosted no doubt by Chinese imports of all those cars and washing machines.
This week the ZEW survey will reveal whether economists can maintain their surprising optimism of recent months. In Italy the equity rally marches on as bank shares become a new favourite of international punters.
Nevertheless, Enrico Letta has yet to' walk the walk' of major reform.
The Economic Monetary Union waiting room continues to fill up. The latest row is over who would fund EMU banks that need emergency recapitalisation under the brave new world of ECB supervision.
Not Merkel, one might wager!
Some good news is that Ireland is planning to leave the waiting room at the end of the year but a golden handshake of retrospective funding for its banks would still be appreciated from a kindly Merkel.
No chance of that either!
Alastair Winter is the Chief Economist at Daniel Stewart & Co
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