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Investors Spooked as Odds of Debt Limit Hike Dwindle

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Today's financial recap and tomorrow's financial outlook.

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Chinese and Japanese finance ministries released comments overnight, urging the US to avoid defaulting on its debt. China and Japan are very prominent holders of US Treasuries and other government-sponsored debt. Japan's Finance Minister Aso said that the US should deal with the debt ceiling quickly before it affects the global economy. The Japanese Nikkei (INDEXNIKKEI:NI225) has fallen 5.86% in the last five days.

US equities started the day unchanged, but quickly sold off. The S&P 500 (INDEXSP:.INX) finished down 0.89%. Momentum and trend-following stocks were the hardest hit. Biotech stocks and new-age tech stocks were down more than 3%. The tech-based Nasdaq 100 (INDEXNASDAQ:NDX) and small cap Russell 2000 (INDEXRUSSELL:RUT) were both down more than 1.5%. The emerging markets sector was the one bright spot, outperforming the broader developing markets.

The one-month Treasury bill auction today was met with very tepid demand. These bills would expire on November 7; their repayment could be subject to delays if the debt ceiling is not raised. Buyers paid a discount rate of 35 basis points. This compares to 2-year notes that yield 0.38% and 1-month LIBOR of 0.17%. The reason behind the sell-off is that investors are concerned that they may not be able to extract their cash if the Treasury delayed interest or principal payments on its obligations.

President Obama gave a press conference in the early afternoon. He stated that he would be open to a short-term extension of the debt ceiling while Congress worked out its long-term differences. This comment is no different from those he has made over the last two weeks.

Alcoa (NYSE:AA) began the the third-quarter earnings season with the first major large-cap company's report. Alcoa beat on both the top and bottom line and reaffirmed its full-year forecast for global aluminum demand. Yum Brands (NYSE:YUM) fell 8% after China comparable sales fell more than forecast and the company lowered guidance for full-year earnings.

Tomorrow's Financial Outlook

The minutes from the FOMC's September meeting will be released tomorrow afternoon at 2:00 p.m. ET. At the meeting, Fed officials chose not to reduce asset purchases, citing tightening financial conditions and a lack of improvement in the economic outlook. Since the meeting, Fed officials' speeches have shown increasing disagreement over the forward path of monetary policy.

The report on August wholesale inventories will not be released due to the government's shutdown.

Industrial production reports from Germany and the UK will be the main market-moving events tomorrow before the US market opens. Other releases include Japanese machine tool orders and the UK's August trade balance. ECB President Mario Draghi will speak at his alma mater MIT after market close.

Costco (NASDAQ:COST), Family Dollar (NYSE:FDO), and Fastenal (NASDAQ:FAST) are scheduled to report earnings.

Twitter: @Minyanville

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No positions in stocks mentioned.

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