Day three of the US shutdown and slowly but surely the markets are starting to quiver as the debt ceiling deadline comes into focus.
Wall Street ended lower, as did the US dollar, which in turn helped leading commodities such as gold, oil and copper lower.
The Dow fell by more than 130 points, or 0.9% while the Standard & Poor’s 500 had a similar fall and the Nasdaq was down 1%.
It was the S&P 500’s biggest fall for a month, a sign of the rising nervousness in the markets.
Twitter released its Initial Public Offering details after the bell in an act of bravery in view of the increasing volatility.
Gold dropped by a quarter of a per cent, while oil and copper were down 1.1% each on the day.
The US dollar fell to new 8 month lows against the euro and as a result, the Aussie dollar was just under the 94 US cent level.
In Australia the ASX joined other Asian markets in rising yesterday with the ASX 200 Index up 19.3 points, or 0.4%, to 5234.9. The All Ordinaries added 17.1 points, or 0.3%, to 5232.
Our market won’t be so confident today with the futures market pointing to a fall of around half a percent points this morning.
US government bonds are starting to react with yields on one month notes jumping to their highest level in 11 months, and yields on bonds maturing after October 17 in the last two weeks of this month are higher as well because of fears about the impact of the debt ceiling.
US 10Y – Markets start to quiver as debt ceiling fears start to dominate the shutdown
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Yields on 10 year securities haven’t much changed in contrast.
The head of the International Monetary Fund, Christine Lagarde warned that a US default would be "catastrophic’.
But credit default swaps on five year US debt is rising, as are measures of market volatility – but so far they are well under the levels of August 2011 when the uS last went to the default cliff.
Markets in Europe and Asia were also mixed to weaker as there were few signs the Republican-dominated House of Representatives voting to fund the government, despite reports of more of members wanting to do so.
And a Gallup Poll found that US economic confidence had fallen to the lowest level in more than a year, with the shutdown blamed by most of those polled.
It is clear the looming default deadline in less than two weeks is now the biggest fear for business, Wall Street and investors.
This has forced markets to become more concerned about the importance of the shutdown because the longer it goes on the greater the dangers to the economy if it gets tangled up in the default deadline.
President Barack Obama sent Wall Street a blunt warning for a third day that it should be very worried about a political crisis that has shut down the government and could trigger a US debt default.
And those warnings are being heeded with Wall Street banks looking past the shutdown brawl to the default deadline around October 17 and starting to take precautions.
There are reports banks across the country are stocking cash machines (ATMs) with extra money and investors are starting to dump Treasury bills because of worries they might plunge further in price if default happens.
The Financial Times and other media reported that two of the country´s top 10 banks say they were putting into place measures used in August 2011 when the government last came close to breaching the debt ceiling.
One senior executive said his bank was delivering 20-30% more cash than usual in case panicked customers tried to withdraw funds en masse.
Banks are also holding daily emergency meetings to discuss other steps, including possible free overdrafts for customers reliant on social security payments from the government.
The US Treasury warned of potential mayhem and confusion in the markets if the US can’t pay its bills from October 17 because of no action on the $US16.7 trillion debt ceiling.
"A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket," the Treasury said in a report overnight, with what it called "negative spillover effects around the world".
"There might be a financial crisis and recession that could echo the events of 2008 or worse," Treasury said.
"Consequences could include higher interest rates, reduced investment, higher debt payments, and slow economic growth. These impacts could last for more than a generation."
And even a "protracted debate" could lead to financial market stress, Treasury warned.
With the budget situation unresolved it is clear there’s now little chance the important September unemployment and payroll data will be issued tonight our time.
Housing industry officials said the longer the government shutdown continues the greater the impact will be on home buyers and investors because lenders will not be able to do full credit and background checks with government agencies such as the IRS.
Retailers warned that a combination of the shutdown and then the debt ceiling could damage the important Thanksgiving-Christmas shopping season.
The industry is looking for a 3.9% rise in sales in November and December compared with 2012, but the chances of that happening will decline the longer the shutdown and if the debt ceiling brawl extends.
