While the potentially high stakes negotiations over the US debt ceiling are the key focus for investors around the world today, the Australian market open is likely to be relatively subdued unless any news breaks beforehand. Investors appear content to take a wait-and-see attitude to this situation. Equity markets are heading into the “pointy end” of the US debt ceiling negotiations with arguably very little risk premium built into current valuations for a bad outcome. While this significantly increases the risk of a large sell-off if the wheels were to fall off world credit markets, investors seem reluctant to incur the opposite risk of being out of the market if the situation blows over. The general belief is that in the final analysis markets are unlikely to be seriously disrupted by this situation. This “she’ll be right” attitude has a number of strands. Firstly, history suggests that politicians will pull back from the abyss. Secondly, there may be scope to prioritize spending to avoid a debt default for another week or to. Thirdly, a temporary technical default may not necessarily be cataclysmic for markets. Assuming short term notes can continue to be used as collateral for Repos and the flow on impact of confidence in the credit markets is not too great, the net effect may only be a temporary delay in payments to creditors. While any news from the US Congress may dominate market sentiment today, the resource sector will take comfort from Rio’s solid quarterly production report. A 4% increase in iron ore shipments in a quarter which saw considerably higher average prices than many were previously forecasting provides a solid platform for the current year.

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