Ten Factors Affecting FX, Bonds and Equities

Capital Markets seem to be taking the partial US government shutdown in their stride. However, the shutdown is having an impact on the asset classes –

1. The US dollar is currently trading on the back foot against most G10 currencies after this morning’s official announcement of a partial US government shutdown. It is their first government closure in 17-years. The EUR bull still has a “lot of wood to chop” to extend its advantage over the dollar – buying EUR’s accounted for +53% of European market flow earlier today.

2. Price action so far suggests that capital markets seem “resigned to living” with the US budget crisis. However, it’s the longer-term crux that is going to have a far greater consequence on the US economy. If the “debt ceiling” become a part of the equation then the greenback will need to deal with much further reaching consequences – a possible downgrade and additional EM woes.

3. Why own the dollar? European manufacturing data painted a largely upbeat picture with output expanding last month in countries including Sweden, Spain and Hungary. The US shut down is not going to help the US economy. Global markets appear focused more heavily on the Fed’s plans to slow their bond buying efforts – US events will only compel the Fed to keep stimulating the economy.

4. Fitch: US Debt Ceiling in Focus After Government Shutdown – “it undermines confidence in both the budgetary process and critically in the prospect of the debt ceiling being raised in a timely manner to avert the risk of default on US sovereign debt obligations.” The U.S. Treasury Department has said its ability to borrow will end on about Oct. 17.

5. US Treasuries prices have dropped on speculation a shutdown of the U.S. federal government may end soon enough for lawmakers to work on extending the debt limit, minimizing damage to the economy. Bonds appear to be trading ahead of the spot FX market. An extended stoppage may prevent the release of the non-farm payroll report this Friday. A report that is closely watched for clues to Federal Reserve policy.

6. US stock futures are tentatively trading higher, mirroring some of the Euro and Asian price movement and this in the face of a weaker dollar. Some overseas investors will continue to look for value and a weaker dollar should in theory be supportive of equities.

7. The US shutdown means that the economic data, like the manufacturing ISM (56.2), construction spending, and auto sales are unlikely to be important market movers today. Estimates of the cost of the US shutdown range from +0.07-0.1% of GDP per day, depending on how many workers are furloughed and for how long.

8. The US government partial shutdown is placing downward pressure on oil prices, as is the political instability in Italy. The American Petroleum Institute is scheduled to release its inventory report later today while US government data tomorrow expects crude inventories to have risen +2.5m barrels last week.

9. Similar to bond price action, gold futures have fallen below $1,300 an ounce to the cheapest in nearly two month on speculation that the US government closure will be short-lived, damping demand for the metal as a haven. Silver has collapsed more than -4%.

10. Despite the manufacturing pick up in China last month the slower pace of increase will probably raise some concerns about the sustainability of the country’s economic rebound.

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