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The Weekly Track shutdowns

- The Weekly Track - Shutdowns by Bob Savage
http://trackresearch.com/articles/the-weekly-track-shutdowns/

The event of the last week was what didn’t happen, namely the US Senate’s inability to fund the government leading to where we are now, the second day of a government shutdown. Most equity players were content to buy regardless of the outcome last week, but given the experience of the last 2013 shutdown, Monday could be more difficult – a 1am vote has been scheduled to get this fixed but few expect it to work. The threat of ending the 60 votes needed for any legislation is ongoing – and this will forever change the way the US Senate works and deals with the minority party. The US bond market correctly reflected some of the pain trade in the ugly politics but not yet enough to make clear that fiscal recklessness is unacceptable. The cost of the 2013 shutdown was seen as 0.2% to GDP and a few billion dollars – but if the shutdown extends beyond 2 weeks, things change. The FX market was hard hit on this event then and it is now, likely leaving the USD down for anot
her week and there will likely be no bounce until this resolves. The weekend brought two other events that were hanging over the markets – another political drama with the Sunday SPD vote 362 for joining formal Merkel talks and 279 against – worse than the expected with just 56% supporting rather than the 60% forecast. However, a Germany with Merkel leading means more Eurozone progress, less fears about the EUR, more room for dealing with expansion, as an example last week, Bulgaria joined the ERM II. Many see the impromptu OPEC meetings of Russia, Saudi and Oman promising the oil production cuts extend beyond 2018 as expected, but important given the Friday sell-off in oil. The 2.6% Brent rise in January will continue to push up inflation concerns. Shutdowns of production, shutdowns of governments, both led the news last week and yet seem to miss the bigger picture of what bothers investors for 2018. Inflation is the key watch and worry and the UK, EU, Chinese and US
versions of that in December just weren’t hot enough to matter. The chilling effect of a US government shutdown adds to the theme that inflation fears are overstated. The price pressures to own equities reflect the ongoing faith that easy money will continue to support risky assets and the search for yield outside of the US.