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US Government Shutdown has Modest Market Impact

Market Digest – Week Ending 10/4

The first week of the fourth quarter passed with the government in partial shutdown mode. At market close on Friday, there were few signs of progress, leading to increasing concern over the upcoming debt ceiling. The Treasury is projected to be unable to fulfill its obligations starting on October 17th. Still, investors remain optimistic. Stocks fell only modestly and bond prices were little changed for the week.

Weekly Returns:

S&P 500: 1,691 (-0.5%)
FTSE All-World ex-US: (-0.6%)
US 10 Year Treasury Yield: 2.65% (+.03%)
Gold: $1,310 (-1.9%)
USD/EUR: $1.355 (+0.2%)

Major Events:  

  • Monday – The Senate rejected a House spending bill which included changes to Obamacare.
  • Monday – Led by a $47 billion issue from Verizon, September set a new record for the most corporate debt issuance. Large amounts of new supply and low rates are potentially bearish for the long term prospects of corporate debt.
  • Tuesday – Large parts of the federal government are shut down.
  • Wednesday – An ADP employment report showed the US added fewer jobs than expected in September.
  • Thursday – House Speaker Boehner said GOP lawmakers were exploring plans to reopen the government and extend the debt ceiling all at once.
  • Friday – Treasury Secretary Jack Lew warned of dire consequences if Congress didn’t raise the debt ceiling, including fallout that could be more damaging than the 2008 financial crisis.

Our Take:

We’re surprised and disappointed that so little progress has been made to reopen the government and remove the rapidly approaching risk of government default. Capital markets have reacted calmly so far. Investors have been trained to expect Congress to take things down to the wire only to reach some agreement at the 11th hour.

That seems the most likely scenario here as well. The debt ceiling deadline of October 17th is more important than the partial shutdown which is now a week old, so both sides apparently feel they have time on their side. But the shutdown is real and has significant impact. Hundreds of thousands are not going to work. The fact that the standoff has gone this far is cause for concern. Congress has already crossed the line of being willing to inflicting damage on the country to drive their cause. Now that this line has been crossed, it could open the door for even less rational behavior in the future. Hopefully there is some indication of the two parties moving closer together over the weekend.

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