World’s Markets Firm Despite U.S. Shutdow

Markets Firm Despite U.S. Shutdown

By BETTINA WASSENER

Published: September 30, 2013

Global investors reacted calmly on Tuesday as the government shut down in Washington, taking heart from the latest sign that the Japanese economy is gaining momentum.

A flurry of last-minute moves by the House, Senate and White House late Monday in Washington failed to break a bitter budget standoff over President Obama’s health care law, setting in motion the first government shutdown in nearly two decades.

The dispute has raised the prospect that federal agencies will run out of money Tuesday, causing 800,000 federal workers to be furloughed and more than a million others to work without pay.

Analysts and investors worry that a government shutdown this week would hit not just consumer and business confidence, but also make it more likely that the United States will default on its debt when it reaches its borrowing limit in about two weeks. Without an agreement to raise the borrowing limit by then, the government will also be unable to issue more bonds.

If the Republicans, who are holding out for concessions on the health care law — the Affordable Care Act — in exchange for a budget vote, back down or are blamed for a shutdown, they would have even less ability to push their wishes by refusing to raise the debt ceiling, analysts at DBS in Singapore wrote Tuesday.

“At the end of the day, it’s political theater that seems unlikely to have much if any medium-term economic impact,” the DBS team wrote. “It worries nonetheless.”

And economists at Standard Chartered in New York wrote in a note e-mailed after the midnight deadline that although they expected an 11th-hour resolution to allow the debt ceiling to be raised on time by Oct. 17, political brinkmanship was likely to last until the last minute.

“The consequences of a debt default would be harmful not only to the U.S. economy but also globally, given the importance of the U.S. Treasury market as a global financial benchmark,” they wrote. “A default would likely lead to a renewed sharp economic downturn, pushing the economy back into severe recession and probably another serious banking crisis.”

The uncertainties led investors around the world to sell stocks on Monday, though markets in Asia mostly inched up on Tuesday, and Wall Street was expected to start slightly firmer. As the midnight deadline passed in the United States, the Nikkei 225 in Tokyo lurched lower, eroding much of its morning gains before climbing again soon after on news that a consumption tax increase — seen as key to sustaining Japan’s strained finances — would be implemented.

By the close, the index was up 0.2 percent on the day.

In midday European trading, the Euro Stoxx 50 index, a barometer of euro zone blue chips, was up 0.6 percent, while the FTSE 100 index in London was essentially unchanged. The bond and foreign exchange markets were quiet.

Trading in Standard & Poor’s 500 index futures pointed to a modest rise at the opening bell on Wall Street. The S.&P. 500 fell 0.6 percent on Monday.

Market confidence was also buoyed by a closely watched quarterly business survey — the Tankan, compiled by the Japanese central bank — which showed that corporate sentiment had improved significantly in the three months to September. The Tankan’s headline index, measuring sentiment among big manufacturers, rose to 12 in September from 4 in June, beating analyst expectations and showing that Prime minister Shinzo Abe’s efforts to pump up the economy are bearing fruit.

The markets in mainland China and Hong Kong were closed for a national holiday, but in Singapore, the Straits Times index edged up about 0.4 percent and the key indexes in Taiwan and South Korea closed up 0.1 percent. In Australia, the S.&P./ASX 200 slipped 0.2 percent after the Australian central bank decided to leave benchmark interest rates unchanged, as expected. .

Wall Street, however, is more worried that the clash on the government shutdown could be a harbinger of fights over the government’s borrowing limit.

The Treasury Department has estimated that it will no longer be able to issue new bonds after Oct. 17 without authorization from Congress. Several Tea Party Republicans have said they will not agree to lift the so-called debt ceiling without the White House making several compromises — something the White House has said it will refuse to do. If there is no agreement, the government would be forced to immediately operate on a balanced budget and could default on its debt — something that has never happened before.

“I’ve got no basis for guessing what would happen there because it would be unprecedented,” said Russ Koesterich, the chief investment strategist for BlackRock.

Investors were keeping a close eye on the market for United States Treasury bonds, one of the most heavily traded markets in the world and a benchmark for the rest of the financial system.

If the government did stop paying interest on its outstanding bonds, those bonds would most likely become less attractive. But investors responded in unexpected ways the last time the government approached the debt ceiling in 2011. Back then, investors flocked to Treasury bonds as a safe haven, despite the fact that the turmoil was caused by concern about the future of those same bonds.

This time around, the dynamics of the market are even more complicated because bond prices have recently been driven by bets on whether the Federal Reserve will ease off the bond-buying programs it has used to stimulate the economy. Some bond traders are betting that political strife will make it more likely that the central bank will continue buying Treasury bonds, making them more attractive.

On Monday, the movements in the bond market showed the complicated and sometimes contradictory forces at work. Even while stocks generally dropped, the prices of Treasuries were volatile. The yield on the benchmark 10-year note fell to 2.62 percent, from 2.63 percent on Friday, and the price increased 3/32 to 99.

“It’s a little bit of a tug of war,” said Kevin Giddis, the head of bond trading at Morgan Keegan.

Some of the complacency on Wall Street about the shutdown has come from the history of market movements in the past. The precedent is not all that frightening, according to data put together by Joseph P. Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management. When the government closed for 21 days in late 1995, for instance, the S.& P. 500 actually rose 0.1 percent during the shutdown.

But Mr. Quinlan was quick to point out that this time around was somewhat different because any shutdown would be immediately followed by debate over lifting the debt ceiling.

David Jolly contributed reporting from Paris and Nathaniel Popper from New York.
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