US Fiscal Showdown Dents Investors’ Confidence

(October 30, 2013) – The global level of investors’ confidence dived into a feeling of pessimism in October, driven by US investors’ disappointment with their country’s government shutdown.

State Street’s monthly analysis of investor sentiment showed investors in North America recording a substantial drop in confidence from 104.3—a positive rating—to 86.5.

The decline was so steep that it dragged the worldwide investor confidence levels into negative territory for the first time since May, down from 101.3 in September to 95.7 in October.

By contrast, confidence improved substantially among European institutional investors, reflected in a 10.2 point increase in the European confidence levels to 111.9—its highest recording since July 2007.

Asian investors stayed their course, resulting in the Asian index recording a modest change, rising 0.9 points to finish at 96.2—still in negative territory.

“The fiscal showdown in the US clearly took the wind from the sails of institutional investors,” said Paul O’Connell, co-author of the report and vice president and senior researcher of State Street Global Markets.

“Notwithstanding the 11th hour resolution of the immediate crisis, investors are aware that the long-term fiscal policy of the US remains to be negotiated, and that the impact of such negotiations on growth and confidence is yet to be seen.”

His colleague Michael Metcalfe, head of cross strategy research at State Street Global Markets, said that by contrast, the rise in investor confidence in Europe showed that they hoped the worst of the Eurozone crisis was now behind them.

 “The US crisis of confidence, in contrast, may just be the beginning, unless policy uncertainty is reduced,” he added.

Russell Investments is also concerned about the impact of US politics on investors’ confidence levels. In its fourth quarter “Strategists’ outlook and barometer”, the authors found a US political tug-of-war remains a great threat to economic recovery.

“The eleventh-hour deal we have just witnessed is just another round of Congressional ‘kick the can,’” said Mike Dueker, chief economist at Russell.

According to the report, policy mistakes could cause anxiety in the bond markets as well as a decline in confidence in the US economy. But the biggest problem of all was a possible halt in the “momentum” of the economy.

If politicians could reach a reasonable fiscal deal, Russell said the US could expect to see almost 3% growth and an average of 200,000 more jobs per month next year. It also predicted 10-year US treasury yields would reach 2.8% in the first quarter of 2014 and 3.2% by the end of the year.

UBS is more positive—in its recent Global Economics Perspectives note, its economists predicted that the government shutdown would not produce any “lasting damage” to the economy.

State Street’s index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors.

The greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral, where investors are neither increasing nor decreasing their long-term allocations to risky assets.

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