The Australia 200 will participate in the international risk on adjustment in equity markets this morning The potential impact of the US government defaulting on its debt obligations means that this issue has necessarily dominated all others for markets over recent days. Today will be no exception. The likely agreement on a short term extension of the debt ceiling has two impacts on market risk calculations. It reduces the threat of immediate crisis but perhaps more importantly, it provides comfort that US politicians are not, in the final analysis, prepared to push the economy and markets over the cliff. While we will see a significant relief rally today, optimism is likely to be capped at this stage. For one thing it is not yet certain that a deal will be struck on the US debt ceiling. Perhaps more significantly for markets, it’s likely that any longer term deal on the debt ceiling will involve further fiscal tightening. This may have a dampening impact on current projections for GDP growth. At the same time this may move the Fed’s taper timetable out which could be a negative for the US Dollar and make it difficult for the Aussie currency to embark on its much wished for decline. Looking at the daily chart for the Australia 200, the 20 day moving average may provide resistance around 5230 in coming days.

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