Thursday 21:10 BST. Washington’s lack of progress in resolving the US budget stalemate kept global equities and the dollar under pressure as worries about the country’s debt ceiling began to bite.
With the Treasury warning that the US could run out of funds by mid-October – potentially triggering a technical debt default – the one-month US government bond yield hit its highest level for nearly a year.
“The prospect of a default in the world’s richest economy may sound preposterous but investors are starting to price in the unexpected,” said Kathleen Brooks at Forex.com.
There were other signs of mounting nervousness in the markets. US credit default swap spreads, which gauge the cost of protecting Treasuries, widened sharply, while the CBOE Vix index of implied equity volatility – Wall Street’s so-called “fear gauge” – rose nearly 5 per cent.
However, analysts pointed out that CDS spreads were still well below levels seen in the summer of 2011 when the US was close to defaulting, while the Vix had some way to go before even reaching its long-term average.
And the overwhelming view in the markets was that a deal would be reached well before the October 17 debt limit deadline.
“It is one thing for the US to undertake a government shutdown, it is quite another for it to renege on its debt obligations,” said Gary Jenkins at Swordfish Research.
“Would politicians really be so stupid as to go through a process in which the potential unintended consequences could be so harmful, where there is no precedent for their actions and where there is no clear plan of what exactly they are trying to achieve?”
Steven Ricchiuto, chief economist at Mizuho Securities USA, argued that there were far more important matters to focus on.
“The stalemate in Washington will eventually be resolved without a default,” he said. “This assures that the shutdown is, and will remain, a sideshow to whether or not the Federal Reserve tapers monetary policy before year-end.”
The US central bank’s decision not to begin scaling down, or “tapering”, its quantitative easing programme last month came as a surprise to the markets – but appears to have been vindicated by the current disruptions.
“The impact on markets of the continued stalemate in Washington has been limited by the assumption that the Federal Reserve will continue on its aggressive QE policy for longer to limit the negative fallout on economic growth,” said Jane Foley, senior currency strategist at Rabobank.
Indeed, such expectations appear to have benefited most of the Treasury curve.
Even as the one-month bill yield shot as high as 17 basis points – before easing back to 13bp, up 5bp on the day – the 10-year US government bond yield was down 1bp at 2.61 per cent.
Jessica Hinds at Capital Economics noted that the US 10-year yield had fallen sharply during the debt ceiling crisis of July and August 2011.
“It also fell less sharply during the two government shutdowns in late 1995 and early 1996,” she said.
But world equity markets continued to suffer from the uncertainty being generated by the budget crisis.
The S&P 500 shed 0.9 per cent, its ninth fall in 11 sessions. The FTSE Eurofirst 300 index reversed an early rise to close 0.4 per cent lower, while the Nikkei 225 in Tokyo eased 0.1 per cent.
Meanwhile, the dollar remained on the back foot amid expectations that Fed tapering was being pushed further and further back.
The dollar index, a measure of the currency’s value against a weighted basket of counterparts, fell to a fresh eight-month low, as the euro held above $1.36 in the wake of Wednesday’s European Central Bank policy meeting. The dollar eased 01 per cent against the yen.
However, gold failed to take much cheer from the weakness of the dollar. The metal was up a meagre $3 at $1,318 an ounce, still well below levels seen at the end of last week.
Industrial commodities were also weak. Copper fell 1.2 per cent in London to $7,189 while Brent oil settled at $109 a barrel, down 19 cents.
The US fiscal drama overshadowed the release of data from the US Institute of Supply Management indicating a slowdown in the pace of service sector activity in September – although it remained at encouraging levels.
Neither did initial jobless claims figures have much impact – as investors paid more heed to confirmation that the September non-farm payrolls report would not be released today.
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