After a confidence rally on Friday, we're seeing European stocks drift down along with US futures. Rumours of a deal over the US debt ceiling have been vaporised over the weekend as fiscal deadlines approach. The US faces a default on 17th October if no progress can be made.
Much of the US is closed for business today – it's Columbus Day across the Atlantic – but the narrative seems much more like that of Groundhog day. Although the Statue of Liberty and Grand Canyon have now been reopened, as New York, Arizona, Utah and Colorado will dip into their own funds to reopen the attractions.
Ishaq Siddiqi of ETX Capital says that "lawmakers in the US are habitual risk takers on fiscal matters" and are now again "flirting with financial destruction".
Before the shutdown began, Goldman Sachs said that a shutdown of just two days would see annualised fourth quarter GDP hit by 0.1 percentage points, and that a week of shutdown could see GDP fall by 0.3 percentage points. We're now coming up on two weeks of shutdown as parts of the federal government remain closed with staff unpaid.
Goldman now say that the second week won't be so bad, but they're now expecting annualised GDP 0.5 percentage points lower than consensus forecasts (currently at 2.5 per cent) on the longer than expected shutdown.
The shutdown has now lasted a second week, but the incremental effect should be smaller. The Department of Defense has brought most of its employees back to work, leaving 450k federal employees still out of work, and thus reducing the effect on federal compensation to $225mn per day. We would expect a small reduction in services-related consumption as well.
Siddiq says that the silver lining for equities is that the Federal Reserve won't be tapering asset purchases with this in the backdrop. Ben Bernanke, chairman of the Federal Reserve, hinted at this in remarks following the no taper decision in September. Back then he said that "upcoming fiscal debates may involve additional risks to financial markets and the broader economy."
So we're still playing the waiting game as we hope that politicians will end their fiscal squabbles sooner rather than later. Mike van Dulken of Accendo Markets says it's not a matter of whether a deal can be reached:
Can they do it? Yes they can. Will they do it? Yes they will. When will they do it?…