President Trump will make a live address regarding border security today at 2100 EST / 0200 GMT which should be worthwhile tuning into considering the implications for a prolonged US government shutdown and ramifications for domestic markets and knock-on effects for Asian markets.
The partial shutdown has now stretched 17 days and ranks among the longest in U.S. history. Trump is rejecting any spending bill, including a package the House passed last week, that does not include more than $5 billion for his border wall on the U.S.-Mexico border – (The longest shutdown on record is 21 days, from late December 1995 to early January 1996).
There have been 20 shutdowns since 1976 and during these periods, stocks achieved returns of about 1.50%. The last government shutdown occurred on Jan. 20, 2018, when Congress failed to pass a bill funding the government through Feb. 16. The market saw the shutdown coming – the predictable result of an impasse over immigration policy. However, leading into the risk, markets were on edge, much like they have been this time around. What came next though back in 2018 was a surge in stock prices on Wall Street to what would result in the third highest level for 2018 in the DJIA, (on earning reports), before the market dumped in Feb to the third lowest swing low for the year.
The Dow plunged almost 1,600 points on Mon Feb 5th, easily the biggest point decline in history during a single trading day at the time. However, buyers leapt back in and limited the damage, but at the closing bell the Dow was still down 1,175 points, by far its worst closing point decline on record. The drop amounted to 4.6%, the biggest decline since Aug 2011 during the European debt crisis. The rout in U.S. markets continued to ripple around the globe and Japan’s Nikkei index dropped 4% while the S&P/ASX 200 in Australia dropped 3%. However, the moves were not related to the government shutdown, but more to do with Trump’s outllook or the eocnomy and the speculation that the Federal Reserve was about to raise interest rates faster than planned – Although it did coincide with the same time period of the shutdown.
The return of reflation on the cards to Trump’ risks of a government shutdown
This time around though, we are entering a period where quite the opposite is expected from the Fed and the return of the reflation trade, which is likely to support stocks and commodity prices and therefore, on theface of it, and given the recent optimism over the Sino/US trade talks and apparent progress, the government shutdown may not be too much of a concerning factor for wider financial and commodity markets. However, the last thing markets need right now is the confidence in the world’s largest economy stripped away. Moreover, tax refunds are at stake if the shutdown goes on for much longer, and that will hit Wall Street and the President’s popularity. Moreover, there are no IPOs expected over the next few weeks, although there are 167 companies that have publicly declared their intention to list, according to MarketWatch. “The lack of activity may reflect uncertainty in the industry about whether or not the Securities and Exchange Commission will be able to complete the necessary paperwork,” The FT reported citing, Joseph Grundfest, a professor at Stanford Law School and former SEC commissioner – “When the SEC does reopen, it will be like a pig moving through a python. There will be a huge backlog of documents to get through — registrations, statements, action letters.” Another key risk is that a prolonged US government shutdown deprives markets of key data, and that is going to be a problem.
Also worth bearing in mind, following a bitter fight over the debt ceiling in 2011, S&P downgraded U.S. sovereign debt due to the gridlocked Congress where there was no apparent willingness to reign in the deficit – The S&P subsequently dropped 6.7% the following trading day.
For the FX space, pairs to watch should be related to stocks and risk. AUD/JPY, USD/JPY, USD/CHF and high beats such as the Aussie. Gold will also be worth monitoring.
About Donald J. Trump
Donald Trump is the 45th and current President of the United States. Before entering politics, he was a businessman and television personality. He become president on January 2017, representing the Republican party.