Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
Global markets displayed caution on Tuesday as fears of an impending U.S. government shutdown weighed on investor sentiment, causing the dollar and equities to slip while gold surged to another record high. The anticipated shutdown stems from a lack of progress in budget negotiations between President Donald Trump and Democratic opponents, threatening delays to crucial economic data and complicating the Federal Reserve’s policy outlook. Meanwhile, China’s manufacturing sector experienced its sixth consecutive month of contraction, adding to global economic uncertainties.
U.S. Government Shutdown Looms
The prospect of a U.S. government shutdown, potentially beginning Wednesday, has become a central concern for financial markets. U.S. Vice President JD Vance indicated that a shutdown appeared “headed to a shutdown” after budget talks stalled. This closure would delay the release of Friday’s key employment numbers and could leave the Federal Reserve without vital economic indicators, such as the next Consumer Price Index (CPI) data, ahead of its October 29 meeting.
Analysts expressed concern over the potential duration of a shutdown and its implications for monetary policy. “The worry here is that if there is a shutdown, it could be long and if we don’t get Friday’s jobs report or the next CPI number, where does the Fed sit?” stated James Rossiter, head of global macro strategy at TD Securities in London.
Market Performance
European stocks saw early declines, with the pan-European STOXX 600 index falling approximately 0.2 percent. Japan’s Nikkei also closed down 0.25 percent. In contrast, MSCI’s broadest index of Asia-Pacific shares outside Japan rose almost 0.5 percent, on track for a monthly gain exceeding 5 percent.
China’s blue-chip CSI300 Index similarly advanced by nearly 0.5 percent, poised for its fifth consecutive month of gains, marking its longest such streak since October 2017. Despite these regional gains, a prolonged U.S. shutdown could temper the global stock rally and impact U.S. economic growth.
Gold and Currency Fluctuations
Heightened U.S. shutdown worries contributed to gold’s significant rally, pushing the precious metal to a new record high of $3,820 per ounce. Gold has surged over 12 percent in September, marking its largest monthly percentage gain since November 2009. The dollar, meanwhile, found itself on the defensive, weakening against the yen, euro, Swiss franc, and pound.
Adding to the cautious sentiment are new U.S. tariffs set to take effect. Tariffs on heavy trucks and patented drugs are scheduled for Wednesday, coinciding with the potential shutdown. Revised tariffs on furniture and cabinets are slated for October 14.
China’s Manufacturing Contraction
In Asia, China’s manufacturing activity contracted for the sixth consecutive month in September, according to the purchasing managers’ index (PMI). The PMI registered 49.8, an increase from August’s 49.4 but still below the 50-mark that separates growth from contraction. This suggests that producers may be awaiting further stimulus measures to boost domestic demand, as well as greater clarity on U.S. trade relations.
Other Global Economic Developments
Oil prices retreated over 1 percent amid expectations of increased production from OPEC+ and the resumption of oil exports from Iraq’s Kurdistan region. Brent crude slipped to $67.11 per barrel, while U.S. crude fell to $62.66. Elsewhere, the Reserve Bank of Australia maintained its cash rate at 3.60 percent, citing an uncertain economic outlook and potentially higher inflation forecasts. Data indicating rising inflation in four key German states had limited immediate market impact.
Outlook
The global economic landscape remains shaped by a confluence of factors, including the looming U.S. government shutdown, evolving trade policies, and varied regional economic performances. Investors are closely monitoring upcoming U.S. jobs data and central bank signals, particularly in light of potential disruptions from a protracted government closure.
