Scoreboard: Shut, cut, run

The effect of the shutdown is being felt on Wall Street where stocks were hit hard as investors seek haven away from US assets.

Still no progress on the US government shutdown it seems, but the sense of alarm is growing and policymakers are doing their best to ensure that it does exactly that – as I highlighted yesterday. Joining the European Central Bank and the Federal Reserve though, we had the International Monetary Fund doing its bit for the cause overnight, highlighting the damage it could do to the whole world, while the US Treasury itself suggested the consequences could be catastrophic – worse than the financial crisis of 2008. This follows comments from the US Treasury secretary that there is a “false sense of complacency about this”, and President Obama himself is telling anyone who’ll listen that investors should be alarmed: “I think this time’s different … I think they should be concerned”, he said.

The message is loud and clear: policymakers want you to worry, they want panic. And they don’t want panic just in the US – they want it to be global. Maybe not? Well, it certainly seems that way with their comments.

Anyway, policymakers may have breathed a sigh of relief last night as investors were certainly a little more concerned, and stocks on Wall Street fell hard – not GFC hard, or even European debt crisis hard, but hard enough. At the close, the S&P500 was down 0.9 per cent (1678), the Dow lost 136 points (14,996) and the Nasdaq fell 1.1 per cent to 3774. By sector, industrials, utilities and tech stocks were hit hardest, although all sectors were in the red.

The problem is, where do you run when the US is at the epicentre of the crisis? Not gold, which was off smalls to $1317, and even US Treasuries didn’t get much of a bid, with the US 10-year Treasury yield only off one or two bps to 2.6 per cent. Indeed the US dollar index fell a bit overnight, which seems to suggest investors are avoiding US assets, instead repatriating funds back into home currency cash deposits. So the euro is at 1.3620 from about 1.3581 yesterday morning, gaining around 300 pips over the last few weeks. This seems to have dragged the Australian dollar higher as well, although currently it’s only up around 10 pips from yesterday afternoon having hit a high of 0.9409 for the session. The yen is down at 97.25 from 97.68.

Other than that we saw crude off 1.1 per cent to $102.9, copper fell 1.2 per cent and stocks in Europe were all weaker, although the session wasn’t as bad as the US – Dax off 0.4 per cent, CaC down 0.7 per cent and the FTSE100 even rose 0.2 per cent.

Now, outside of the shutdown economic data was mixed. The non-manufacturing ISM index was out and this slipped from about 58 to 54 with output, new orders and employment all falling. It is nevertheless still showing the sector accelerating, just at a slower pace. But with everything else going on, it’s not helping sentiment. Nor indeed were jobless claims. Once again these rose modestly, but that’s not the point. The point is new jobless claims remain around a six-year low at 308,000, defying expectations for a lift or a correction.

So then for the day ahead, the SPI points to a 0.5 per cent fall for our market, while data-wise, there really isn’t anything much, with US payrolls held up by the shutdown. Otherwise, there is a lot of Fed speak with Richard Fisher, William Dudley, Jeremy Stein and Narayana Kocherlakota all due to give speeches. At the moment they are all singing in unison – the shutdown will delay the taper.

Have a great weekend…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.