The US government shutdown has endured for another day, and US equities have notched up all-time highs (as hit by the DJIA, Nasdaq and S&P500 on Thursday), which illustrates the market’s current tolerance for scaled-back government operations, at least for a short duration. But the longer the shutdown lasts, the larger the dent which could be made into GDP.
It is feasible that traders may expect the shutdown to last days or a few weeks, but anything beyond this could really test the mettle of the current bul market. So, I think the gains we are seeing on risk assets are largely predicated on expectations that the shutdown will be resolved during October rather than extending to later months.
In FX, the yen has been having a productive week with the Japanese currency being the recipient of haven flows. The USDJPY rate has fallen around 1.5% this week due to the Dollar being pressured by shutdown concerns. However, should Congress in the US agree to a funding bill (to end the shutdown) in the coming days or weeks, the USDJPY rate could be susceptible to a reversal higher.
Japan's LDP (Liberal Democratic Party) presidential vote this weekend could jolt the yen: A win for reformist Shinjirō Koizumi might signal fiscal tightening and BOJ hawkishness, potentially injecting strength into the yen; but a nationalist like Sanae Takaichi risks more political gridlock, prolonging yen weakness amid stalled reforms and tariff tensions. As such, the USDJPY could be trading in lively fashion early next week once the election outcome is known.
The USD got a mild reprieve on hawkish comments from Fed member Logan, who cautioned about more rate cuts. This saw the Dollar Index DXY) nudge higher from around 97.40 to 97.80. This climb in the USD caused a minor speedbump for the gold price, but the precious metal is still well within shouting distance of the $3900 level. Gold trades at $3860 early in the Asian trading session on Friday, ahead of support at $3811 and $3777. Resistance sits at $3891. Overall, with a US government shutdown creating uncertainty over the GDP impact, and with lower US interest rates likely arriving again this month, conditions remain ripe for gold to continue marching forward.
Oil has made a break lower from its trading range which has held since the start of June. The US contract hits its lowest price since late May on expectations that OPEC+ may announce a larger production increase than was previously expected when they meet this weekend. While crude did fall below $61, the price has thus far held above $60 with traders still trying to guess whether any production increase announced will be closer to 100k bpd (barrels per day) or 500k bpd. There is scope for an oil rebound is OPEC+ announce a production increase which is at the lower end of expectations. But for now, the price remains pressured to the downside.
Looking ahead – ordinarily we would be looking forward to the NFP (non-farm payrolls) release to round out the trading week, but it looks like the US government shutdown will deprive us of seeing this macro-data favourite this time around. With the NFP being one of the ‘casualties’ of the shutdown, at least as far as the economic calendar goes, traders will be clinging onto other things which may sway sentiment such as more comments from Fed officials. But overall, a rate cut from the Fed later this month is still expected, which is helping to offset any uncertainty stemming from the shutdown.
