Markets unfazed by partial US shutdown

THE US federal government officially shut down partially for the first time since 1996 after Congress failed to reach a compromise on the budget. Even as most stock traders shrugged their shoulders, economists warned that a prolonged shutdown would rattle confidence and drain much-needed spending from the economy.

Investors appeared to take the news in their stride, with the US stock market edging higher in early trading. The Dow Jones Industrial Average rose 12 points, or 0.1 per cent, to 15,141 points in the first few minutes of trading yesterday. The Standard & Poor's 500 index was up five points, or 0.3 per cent, at 1,687.

The S&P has lost ground on seven of the past eight trading days. The Nasdaq composite index was up 16 points, or 0.4 per cent, at 3,787. European markets were mostly in positive territory, as were most Asian bourses. News of the partial shutdown weakened the dollar, sending it to an eight-month low against the euro.

Investors viewed the shutdown as likely to be temporary, with its effects limited and already priced into markets.

Republican House of Representatives leaders, bowing to the mutinous Tea Party faction, demanded that changes to President Barack Obama's healthcare reform package be a condition of passing a general budget bill. The president and the Democratic Senate leaders who supported him refused to reopen the thorny issue of healthcare and looked for savings in other programmes.

The bell tolled at midnight as the two sides failed to meet an Oct 1 deadline for appropriations and for the new provisions of the health law to take effect. By today, more than one-quarter of the government's nearly three million employees will be sent home on "furloughs" - unpaid, indefinite periods of leave.

If 800,000 people lose their discretionary income for a week, the US economy can lean on some of the tens of millions of salaried consumers. If the shutdown stretches out for a month or more, what is effectively a massive round of layoffs will deal a blow to the economy as similar job losses did during the global financial crisis.

While "essential services" are not supposed to be affected, some of those furloughed would become essential in an emergency - such as many in the Centers for Disease Control. Furthermore, if the spending freeze continues, many government agencies will suspend contracts with private vendors - a massive business for industrial and technology companies such as General Electric and IBM.

It is a measure of legislators' ineffective fiscal management that US stocks looked set to rise on the first day of the shutdown.

"The hope is . . . the shutdown will be short-lived so there won't be long-term lasting effects on the markets or the economy," said Sean Simko, head of global fixed income at SEI Investment.

A weekend CNN poll indicated the public will blame the Republicans for the shutdown, suggesting the party will be under more pressure to compromise. Reading into statements by Idaho Representative Raul Labrador, a recent Slate.com piece predicted that House Republican leaders will soon override Tea Party demands and give up the healthcare fight.

Joseph Quinlan, chief market strategist at US Trust, Bank of America Private Wealth Management, said Wall Street goes about its business as well - or perhaps better - when Capitol Hill closes down. "Since 1976, the federal government has closed its door 17 times," Mr Quinlan wrote in a note to clients. "The last time the government decided to shut down was in fiscal year 1996 - then, the government actually closed twice, for a combined 26 days."

"And how did Wall Street react to the 1996 twin shutdown? Answer: with a yawn, basically."

Mr Quinlan's charts suggest that none of the shutdowns in recent history coincided with major bear markets. Similarly, analysts at Piper Jaffray argued that the recent "turbulence" was a "buying opportunity" and forecast a big fourth-quarter stock rally as the "uncertainty in Washington subsides".

For the long-term budget picture, the shutdown is a sideshow. Neither side has mentioned cutbacks to social security, Medicare or Medicaid that all economists say must happen in order for the United States to balance its books in the long term. While a "stable fiscal situation" is likely the goal of both sides, there are "very difficult decisions that need to be made" and very different views between the parties on how to make them, said Mr Simko of SEI Investment.

One silver lining for traders is the effect of the shutdown on Federal Reserve chairman Ben Bernanke's "tapering" plan. Mr Bernanke had cited fiscal worries as one reason for delaying the taper in September, and will likely hold fire again at the October Fed meeting.

In the short term, some of the chaos in Washington, DC is bound to spill over on Wall Street. Staff cuts at the Labor Department could delay Friday's jobs report, for example.

"If that's interrupted, obviously the markets are going to take it one day at a time," said Mr Simko.