US shutdown worries start to weigh

The week was dominated by political events in the United States, where bickering Republicans and Democrats forced the government into a partial shutdown.

The shutdown, in which government employees were forced to take an unwanted and unpaid break, was a result of a failure to pass a government funding deal.

Local investors spent the week adapting, but they seemed increasingly nervous as the shutdown dragged on.

There was a change in tone from last week, and investors appeared unperturbed by the possibility of the shutdown and helped the sharemarket to close on a five-year high. But this week things were different as the shutdown actually happened. For the week, the benchmark S&P/ASX 200 lost 99.1 points, or 1.9 per cent, to 5208, while the broader All Ordinaries Index shed 96.4 points, or 1.8 per cent, to 5205.9 points.

Economists have noted that past shutdowns have had different consequences, some failing to worry markets at all. But by Friday the level of concern had risen.

"The disagreements within US Congress have reached a point that could significantly destabilise the US economy and disrupt financial markets," St George chief economist Besa Deda said.

"The US has typically been in similar situations before in the past, and Congress has usually avoided a catastrophic event at the eleventh hour. However, the extreme deadlock is worrisome, and at present the parties appear no closer to compromise."

Ms Deda warned that if the shutdown dragged on, it could take a "sizeable chunk" from fourth quarter GDP growth. But a potentially bigger problem was looming.

"The consequences of failing to raise the US debt ceiling in time would be more damaging and the negative impact could be longer-lasting," she said.

"Even the prospect of default would be disruptive for financial markets and poses a downside risk to economic growth."

Rob Henderson, NAB economist, agreed. "The more important US fiscal issue is the debt ceiling, which needs to be lifted by October 17 if a default on debt servicing by the US government is to be avoided," Mr Henderson said.

"This has the potential to be far more catastrophic for the US economy, markets and the global economy. Hence, developments on that front need careful monitoring over the next couple of weeks."

Next week, depending on how things go in the US, the coming financial reports from some of Australia's big banks, and quarterly earnings reports from the US, could shift the focus of investors away from macro-economic issues.

For the week, Leighton Holdings dropped $2.43, or 12.7 per cent, at $16.74, after the former boss Wal King denied knowledge of the construction giant's allegedly corrupt dealings in Iraq.