Belfast Telegraph

Monday 20 October 2014

Fears as next US deadline looms

The pound has risen against the dollar following a partial US government shutdown.

Global markets have taken the US shutdown on the chin but there are fears that it could prove little more than a "warm-up act" to the looming deadline for an agreement on government borrowing.

The world's biggest economy risks defaulting on some of its payment obligations unless Congress consents to raising the federal borrowing cap by mid-October.

It presents investors with a potentially far bigger headache than the current impasse on government spending - which hinges on political wrangling over US president Barack Obama's healthcare reforms.

The shutdown has seen up to 800,000 public service workers placed on temporary unpaid leave and all but non-essential government activities suspended - for the first time since the winter of 1995/96.

Tourists were also hit after a midnight deadline on the budget expired, as the move meant the closure of national parks, museums along the Washington Mall and US Capitol visitor centres.

But financial markets had generally already factored in its impact, and though it is likely to cost billions of dollars, it was seen as still being relatively small in the context of the sizeable economy.

On Wall Street, the Dow Jones Industrial Average slipped 130 points overnight, but it recovered some of the losses in today's session.

In the City, the FTSE 100 Index was flat while in Europe, France's Cac 40 and Germany's Dax posted significant gains as fears over a separate government crisis in Italy appeared to ease.

America's currency was broadly weaker on the shutdown but did stage a mini rebound, although the pound held on to a 10-month high at 1.62 US dollars.

Joe Rundle, head of trading at ETX Capital, said investors could take the view that if resolved quickly, the shutdown would do little to damage the overall health of the US economy.

In the background was the constant speculation about the US Federal Reserve's ongoing quantitative easing (QE) programme, which continues to pump billions into the economy every month and whose future has had markets on edge for months.

Anxiety over QE means that, perversely, economic setbacks in the US can boost shares as they make the prospect of the taps being turned off less likely - so helping investors shrug off the negative impact of the shutdown.

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, added: "Investors have become used to political brinksmanship in the US with negotiations going to the wire but each time a resolution has been found."

The impasse in Washington hinges on a refusal by the Republicans in the House of Representatives to pass a routine spending bill unless so-called "Obamacare" reforms are delayed - and a refusal by the Democrat-held Senate to accept the conditions.

Though markets looked relaxed about the stalemate for now, the refusal of either side to give ground and the ongoing game of blame and counter-blame looked likely to herald difficulties when the debt ceiling talks come.

Mr Lowcock said: "These negotiations are the warm up act. The bigger issue, in around 17 days' time, is negotiations to raise the 16.7 trillion dollar 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."

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