Credit spreads drifted wider on Monday as US legislators appeared to make little progress in breaking the deadlock in Washington.

Both sides seemed to dig in their heels over the weekend and conciliatory language was conspicuous by its absence. Indeed, Republican House Speaker John Boehner said that "it is time for us to stand and fight" in the ongoing battle over government funding resolution.

The main fear for the markets is that the debate will prevent the debt ceiling being raised by October 17, which raises the possibility of the US missing interest payments on October 31. This is still an unlikely scenario, and is reflected in the relatively calm conditions over the past week.

The Markit iTraxx Europe was just 1bp wider today at 98.5bps, and is almost 6bps tighter than where the index was trading last Monday. The Markit CDX.NA.IG has probably felt the impact of the government shutdown more than its European counterpart, which is no surprise, and the index was 1.5bps wider at 81bps. But this is still 2bps tighter than where it was trading this time last week.

So it appears that the market consensus is that the political turmoil will soon blow over. However, in the near-term the shutdown has had discernible effects, particularly on the release of economic data. The non-farm payrolls report scheduled for last Friday was postponed, and it is likely that the already light data calendar for this week will be disrupted.

That may leave the stage to the US earnings season, which begins on Tuesday with Alcoa. It won't really gather momentum, though, until Friday, with the results of JPMorgan and Wells Fargo.

Download full article