How a US government’s closure can affect world markets

The US government brought a standby on Wednesday and created a discussion on the global markets, while investors weighed the potential impact on the broader economy.

Although the closure of the government typically has a negligible impact on capital markets, the timing of this one is significant.

US work data that will be published on Friday will be delayed by the move – to delay the prospects for the Federal Reserve a few weeks before the next meeting. President Donald Trump also threatened to use the closure to put “many” from public sector work cuts.

With no clear path to an agreement, it is also unclear how long the impasse will hold federal offices. During Trump’s first term in office, a partial downtime entered – the longest in history.

US risks were shaky on Wednesday. Gold – typically considered a safe haven asset in times of economic or geopolitical turmoil – achieved its 39th record height this year. European stocks rose higher in the late morning trade, with a momentum after an ominous Open, and shares listed in Asia were mixed in Wednesday’s session. Meanwhile, global government bonds have cooled down after the returns on bonds issued by the European government hit early trade. However, the US 10-year treasury yield traded 4 basis points lower after a surprise surprise in private payrolls.

According to Luke Bartholomew, Deputy Chief Economist at Aberdeen, the closure contributes to concerns about US institutional credibility, fiscal position and ‘dysfunction’, according to Luke Bartholomew.

“I am definitely hit by how much political capital the Trump administration is willing to spend on the reform, if I can put it, the Federal Reserve, which influenced the Federal Reserve,” he told CNBC’s “Squawk Box Europe” on Wednesday.

“The Fed is finally the Bedrock Institution for Global Capital Markets. The long-term premium is all under pressure, and I would expect the theme to continue,” he added-but he noticed that it would be “surprised if the market finally didn’t go up.”

Neil Birrell, investment officer at British investment firm Prime Minister Miton, said a prolonged closure is likely to dampen the risk-on-sentiment in the global markets.

“With bond markets responding to extreme government loan requirements, credit distribution is now and stock markets near highlights with unforgiving valuations, it’s hardly surprising to see investors move to the perceived safe havenbates when a negative event like a US government comes to the city,” he told CNBC. “

“Investors were complacent about the risks we face, and negative surprises will provoke a reaction. Any form of diversification seems attractive, including other metals such as silver, crypto and perhaps other commodities.”

Joe Brusuelas, chief economist at RSM US, noted that the biggest result for markets could be further pressure on the Greenback or an impact on the Fed’s October tariff.

“For most of the US government’s closure, a modest speculative behavior by world investors around rates and currencies. This issue of the US fiscal Follies is no different,” he told CNBC by email on Wednesday.

“To have a greater impact on the global markets, the US government’s closure will have to be expanded during the month to the record of 2018-2019. Should this take place, it will probably affect the Federal Reserve policy decision at the end of the month, which will probably affect the global mass flow, interest rate and foreign exchange values.”

Brusuelas noted that federal workers’ firing -fire “is likely to lead to further declines in the value of the dollar, leading to capital flow to the Euro and yen. “

Widespread layoffs could also have an effect on the European industry, Brusuelas told CNBC.

“The demand for European exports such as cars will fall in particular, which will contribute the pressure of German industries,” he said.

In a note Tuesday, however, analysts at Swiss Investment Bank UBS said that they did not regard the closure as an important risk event, despite admitting that it was not a welcome development for world investors.

“Closes historically only had a subdued market impact,” they explained. “The closure of the government has typically caused modest and short-lived volatility in fairness and bond markets, because investors understand that the economic impact is also typically reasonable and of short-term … Treasury auctions and payments will continue as normal, and although ipo activity and some regulatory processes may not be a significant risk for the exploitation of market.”

UBS also argued that any temporary delays in the data were unlikely to throw the Fed’s relief cycle of course.

“A closure would suspend the collection and release of most economic data on the government,” they said. “It will also affect the revision of past labor data, which has been more important lately … It does mean that the Fed can make its October policy decision without the benefit of the updated labor market data, but we do not see that it prevents a further 25bp rate cut.”

According to the CME’s Fedwatch tool, the money markets are overwhelmingly prices in a 25-based points cut on the Fedwatch instrument of the Fed on October 29.

“We advise investors to watch the fear of closing and focus on other market managers, such as the mix of continued rate cuts, strong corporate earnings and robust AI Capex and monetization,” UBS’s team added to their note on Wednesday.