HOT AIR BALLOON FLIGHT

By Julia Horowitz • Friday, October 1

Good morning. In today's newsletter: Congress' work is far from done, keeping markets on edge. Plus, US stocks record their worst month of the year, and "Squid Game" drives Netflix shares to an all-time high.

 

US stock futures are kicking off October in the red. Markets in Europe dropped in early trading, while stocks in Asia were mixed.

 

🚨 This just in: Shares of Merck are up 7% in premarket trading after the company said it had developed a pill that reduces the risk of hospitalization or death from Covid-19. Read more here.

 

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EYE ON WASHINGTON

Congress prevented one crisis. Another looms

 

Congress started the week with an urgent to-do list. It may have crossed off one item, but crucial issues concerning investors still haven't been resolved.

 

What's happening: US President Joe Biden signed a stopgap funding bill Thursday night to avert a government shutdown. That's good news. Yet lawmakers remain bitterly divided over raising the debt ceiling, as time to reach an agreement ticks down.

 

Treasury Secretary Janet Yellen warned earlier this week that the government is set to reach its borrowing limit by Oct. 18. If action isn't taken before then, it could trigger the first-ever US default, which businesses have warned could deal a huge blow to the economy and cause market chaos.

 

"I think it's scary for consumer confidence and for confidence in US businesses and potential credit ratings if we don't make sure that we raise that debt ceiling," Amazon CEO Andy Jassy told CNBC earlier this month.

 

The US Treasury outlined the stakes in a report published in 2013, another time markets displayed serious concerns about debt ceiling brinksmanship.

 

"Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse," the Treasury wrote.

 

Catch up: The House of Representatives has voted to suspend the nation's debt limit until December 2022, but the legislation hasn't made it through the Senate, which is split 50-50 between Democrats and Republicans. 

 

Republicans want to force Democrats to go it alone through the budget reconciliation process, which only requires 50 votes.

 

The Biden administration's huge infrastructure spending plans also remain in limbo, undermining investor expectations of additional stimulus.

 

House Speaker Nancy Pelosi ruled against putting a $1 trillion infrastructure bill on the floor Thursday night after a rebellion from the Democrats' progressive wing. Negotiations will resume Friday.

 

Step back: Wall Street is increasingly antsy, though there's still some optimism that Democrats and Republicans can strike a deal to prevent a US default.

 

In a survey of more than 90 clients conducted in mid-September, Citi found that more than 60% of respondents predicted the debt ceiling would be raised after Oct. 1 but before the middle of the month.

 

"We assume that an agreement can once again be reached at the last minute," Commerzbank senior economist Bernd Weidensteiner said in a research note Friday. "However, the politically muddled situation and the tight timetable increase the risk of an accident."

 

Markets will likely remain "nervous" until there's more clarity, according to Societe Generale strategist Stephen Gallagher.

 

"It is more a political strategy and a game of chicken that could go awry but hopefully not," he said this week.

VOICES

Crypto bull warns not everything is a winner

"I would bet 75% of cryptos don't make it."

 

MIKE NOVOGRATZ, GALAXY DIGITAL CEO

 

Watch his full interview at CNN Business' "Foreseeable Future" live event.

MARKET FLASH

Stocks record their worst month of the year

Wall Street logged its worst month of the year in September, as concerns about inflation, slowing economic growth in China, the US debt ceiling and central bank policy weighed on investors.

 

The latest: The S&P 500 finished the month 4.8% lower, its biggest drop since Covid-19 fears erupted in March 2020. The tech-heavy Nasdaq Composite fell 5.3%, while the Dow shed 4.3%.

 

The S&P 500 managed to eke out a small gain for the third quarter, and remains almost 15% higher this year. 

 

But sentiment has shifted. The CNN Business Fear & Greed Index is in "extreme fear" territory, after producing a less severe "fear" reading one week ago.

 

"Winter is coming — and the bears are not hibernating," Jan Lambregts, head of RaboResearch global economics and markets, warned clients this week. 

 

Remember: September is historically the worst month of the year for stocks, while October is notorious for the market crashes in 1929, 1987 and 2008. Yet according to LPL Financial's Ryan Detrick, the fourth quarter, which starts Friday, has produced the best S&P 500 returns since 1950.

 

That makes it hard to put too much stock in the calendar. What is clear, though, is that markets are trying to power through a growing list of headwinds. The result could be more volatility.

 

"The S&P 500 has now gone an incredible 317 trading days in a row above its 200-day moving average, one of the longest streaks ever," Detrick said in a research note Thursday. "A [5% to] 7% pullback could potentially come at any time given we haven't had one in so long."

UP NEXT

The Federal Reserve's preferred measure of inflation posts at 8:30 a.m. ET.

Also today: The ISM Manufacturing Index for September arrives at 10 a.m. ET.

 

Coming next week: Will Congress raise the country's debt ceiling? Debate in Washington will remain a key focus.

WHAT WE'RE READING AND WATCHING

▸ Facebook grilled by Senate over impact on kids (CNN Business)
▸ Customers ditched Bed Bath & Beyond last month (CNN Business)
▸ Vaccine mandates have reached 25% of US companies (Bloomberg)
▸ China's manufacturing industry is officially in trouble (CNN Business)
▸ Scarlett Johansson, Disney agree to end lawsuit (CNN Business)
▸ Zoom's nearly $15 billion bid for Five9 is rejected (WSJ)

FINAL WORD

'Squid Game' drives Netflix shares to all-time high

One bright spot for markets on Thursday? Netflix, whose shares rallied 1.9% to hit an all-time high.

 

The streaming service is riding high from the popularity of its new South Korean thriller series "Squid Game," which has been a huge hit.

 

"It's a very good chance it's going to be our biggest show ever," Netflix co-CEO Ted Sarandos said in an interview this week.

 

Step back: Shares of Netflix had been struggling to break out this year. The company said it lost 433,000 subscribers in the United States and Canada during the second quarter.

 

But Asia clearly represents a big opportunity (my CNN Business colleague Michelle Toh has written about this before). Netflix added more than 1 million new subscribers in the Asia-Pacific region between April and June.

 

YipitData, a research service, has estimated that global Netflix downloads have reached their highest levels of the year, powered by activity in Asia tied to "Squid Game," specifically.

 

What it means: Expect Netflix to keep pumping money into international programming, a strategy that will help it to grow outside its increasingly competitive home market. Asia is definitely a key focus, but Europe is also on the radar following the buzz around French-language drama "Lupin."