People said it wouldn’t happen. That Congress would come to its senses before the September 30 deadline. Indeed, commentators largely assumed that no politician would want a shutdown of the US government on their head. They were wrong, but the consequences might not be quite as bad as it would seem on the surface, according to one scribe. And with all the bluster in Washington, there’s almost uniform agreement that the RBA was wise to take a wait-and-see approach at yesterday’s monthly board meeting.
The Australian Financial Review’s Philip Baker takes a look back at past government shutdowns – yes, there’s been a few – and finds that such events actually turn out to be positive for the stockmarket. Work that one out.
“If the shutdown does drag on, and there is a significant selloff in stocks, it could well be a buying opportunity if history is any guide. Since 1976 there have been 12 showdowns and yet the major S&P 500 index has gone on to rise 11 per cent per annum, on average, the following year. Normally, investors can expect a 9 per cent annual return from the index. Twelve months after the last shutdown in December 1995, the S&P500 rose 21 per cent, according to Bloomberg, but the largest rise was a 36 per cent rally in the 12 months after a one-day closure in 1982.”
Baker’s colleague at the AFR Jennifer Hewett, however, spotlights the danger signs in the development – it’s not what’s happening now that’s the problem but what could take place in a few weeks’ time.
“The greater problem … is the belated realisation that the inability of US Congress to avoid this sort of shutdown means that there can also be no guarantees about the looming confrontation in Congress over raising the US debt ceiling… The Republicans won’t support raising this without major concessions on spending from President Obama. So far, he is not willing to make them. The stand-off over Obamacare is, in that sense, just another front in a broader war.”
Indeed, the debt ceiling was one reason for the RBA to pause at yesterday’s rate meeting, according to The Australian’s John Durie, but there were plenty of others.
“Global financial markets are in a curious position. Asian markets are ignoring potential peril in the US and European CFOs are turning maximum bullish. All this means that the Reserve Bank's expected decision to leave its rates on hold is absolutely the right move.”
And while the Reserve Bank didn’t pinpoint moves in Washington in its statement, you shouldn’t assume they weren’t factored in given the impact on the Aussie dollar, according to Fairfax’s Malcolm Maiden.
“If the Republicans continue to use the funding bill to try and hold off President Barack Obama’s Affordable Care Act health insurance overhaul and the stand-off continues, non-essential public service cuts will expand and America’s economic growth will take a hit. That in turn would make the Fed less likely to begin winding back its QE program quickly. Both events would tend to push the US dollar down, and the $A-$US rate up.”
The Herald Sun’s Terry McCrann agrees, arguing the potential for Washington stagnation to push the Fed’s taper timeline back is the most crucial thing to watch.
“The two big things that are on the RBA's mind, are the growing activity in the property market and the US Fed's "taper". This is where the US budget battle does impact. Even if resolved relatively quickly, it's probably already been sufficient to persuade the risk-averse retiring Fed-head Ben Bernanke against starting the taper at the next Fed meeting.”
The Australian’s Richard Gluyas, meanwhile, explains why housing market alarmists would be unhappy with RBA chair Glenn Stevens and in local politics, the AFR’s economics editor Alan Mitchell discusses the choices available to Prime Minister Tony Abbott to make sure the next recession we face is mild.