Uncertainty Over U.S. Government Shutdown May Fuel Flight-to-Safety Moves

The U.S. government remains shut down for a second day with Washington officials making almost no progress toward a deal to reopen the government before the financial markets open on Monday.

Government officials in both the U.S. House of Representatives and the U.S. Senate talked into Saturday evening before Congress adjourned until Sunday.

Republican lawmakers tried hard to avoid the shutdown when the House passed a month-long spending bill late Thursday, but the bill died in the Senate on Friday, prompting the government to shutdown at midnight Saturday.

The key issues remain the same at this time, the Republicans want the funding and the Democrats want to move toward striking a deal on immigration legislation and reauthorizing a popular children’s health insurance program.

Throughout Saturday’s negotiations, the politicians argued about the length of stop-gap measures with some wanting a plan that would extend funding to February 8 and others insisting on an extension to February 16. Some government officials feel that a longer extension will allow the two political parties ample time to resolve differences on long-term spending levels, immigration and health care.

At the end of the session on Saturday with negotiations going nowhere, it’s starting to look like the shutdown could last well into next week.

Economic Impact

A short-term shutdown should have a modest economic impact. However, according to estimates, each week of shutdown would reduce real GDP growth in Q1 by 0.2 annualized.

Financial Market Impact

A prolonged shutdown would mean that investors would not get important government economic data. Reports at risk this week include Crude Oil Inventories, Natural Gas Storage, Weekly Unemployment Claims, Goods Trade Balance, Preliminary Wholesale Inventories, New Home Sales, Advance GDP and Durable Goods.

The U.S. stock exchanges will remain open. They aren’t government property.

The shutdown itself isn’t likely to have that much of an impact on the financial markets, however, the uncertainty over the length of the shutdown will be the major concern. We have seen in the past that investors don’t like uncertainty. So in response to the shutdown, we may see the typical response by investors.

If investors decide there is something to worry about then they will sell just enough stock to alleviate their concerns. At the same time, money may flow into safe haven assets like the Japanese Yen and gold. This should put pressure on the U.S. Dollar.