The US Government has begun its first partial shutdown in 17 years, following congress’ failure to agree a budget to continue its funding.
The S&P 500 closed down 0.6%, whilst the US dollar fell against sterling last night, as investors digested the news. The market’s reaction to the shutdown has been muted and suggests investors are expecting a resolution to these negotiations.
Adrian Lowcock, Senior investment Manager at Hargreaves Lansdown says;-“Investors have become used to political brinksmanship in the US with negotiations going to the wire but each time a resolution has been found.
These negotiations are the warm up act. The bigger issue, in around 17 days’ time, is negotiations to raise the $16.7trn US debt ceiling. Failure to raise the debt ceiling and allow the US government to continue borrowing could force the country into a default scenario which could then have more serious consequences for investors.
A US default is highly unlikely but political negotiations could create volatility in stock markets.
This doesn’t look like a selling trigger. Investors should focus on their long term goals and use any short term weakness as opportunities to invest.”
The 2011 Debt ceiling
In August 2011 a similar scenario played out. The S&P 500 fell 19.74% from its peak in July 2011 as the S&P credit rating agency cut their top notch rating for the US and investors sold out. However by the end of the year the S&P had recovered and ended the year up 1.46%.
Chris Saint, Head of Currency Dealing, Hargreaves Lansdown “The US dollar extended its recent decline against the pound (lows of US$1.6261) after the deadline was missed. The fallout appears to have been limited by hopes that significant damage to the US economic recovery will be avoided, assuming a resolution can be agreed upon very soon. In September we saw demand for US dollars rise 29% on the previous month.”
At the time of writing, the exchange rate stands at:
Sterling / US dollar 1.6242 +0.37%