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World’s markets firm despite U.S. government shutdown

First Published Oct 01 2013 12:26PM      Last Updated Oct 01 2013 12:26 pm

Global investors reacted calmly Tuesday as the government shut down in Washington, with Wall Street stocks trading higher.

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 Barack Obama’s health care law, setting in motion the first government shutdown in nearly two decades.

On Wall Street, the Standard & Poor’s 500-stock index added 0.8 percent in midday trading, and the Dow Jones industrial average rose 0.5 percent.

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 U.S. 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 emailed 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. 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 sales 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 European trading, the Euro Stoxx 50 index, a barometer of eurozone blue chips, closed up 1.2 percent, while the FTSE 100 index in London ended down 0.2 percent. The bond and foreign exchange markets were quiet.

Market confidence in Japan 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.

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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.

 

 

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