The US Federal Government Shutdown and its potential impact on Australian investors

Although in Australia we feel somewhat detached from the much talked about recent 16-day partial federal government shutdown in the US, it would be somewhat naive to think it won’t have an impact on the Australian economy. Before getting into the finer details of the economic implications, we thought we’d go back to basics and understand what events led to the federal government closing its doors.

What is a US Government Shutdown?

In the US, when the two major political parties cannot agree on the funding bill and a continuing resolution (or a mini-budget) isn’t passed, the US federal government cannot operate, hence the inevitable next step of a government shutdown. Whilst a ‘shutdown’ sounds like it could send the US into crisis mode, it should be noted that the government does continue running most essential functions such as border patrol, the military, air traffic control and social security offices.

The US government shutdown option is not new – with the first one occurring in 1976, the US has seen this happen 17 times since. However, it usually only lasts a day or two.  This pattern changed in 1995 with a 28 day shutdown during Bill Clinton’s presidency regarding funding for education, public health and the environment.

Why did the US government shutdown occur this time?

President Obama’s Affordable Care Act came under attack during the Republican and Democrats discussions on how best to spend the US$1 trillion budget for fiscal year 2014. Since 2011 the House Republicans have spent 15% of their time on the floor arguing against the health care law, so it was no surprise that they amended the continuing resolution so that it defunded the health care law meaning it could not be passed until one side yielded.

What does it mean for Australians?

Kristie Spicer from Business Spectator published a great article this week called ‘Equities may hay while the taper delays’ which provides a high level summary of what we can expect in the near future as a result of the US federal government shutdown. To read the full article, follow this link http://www.businessspectator.com.au/article/2013/10/21/asx/equities-make-hay-while-taper-delays

The top points to consider for Australian investors and markets:

• The Australian sharemarket is well placed to experience reinvigorated investor interest as talk of the US tapering timeline pushes out until March 2014.
• Recent bouts of volatility in domestic and international equity markets on the back of taper talk suggest they would prefer the US to maintain quantitative easing.
• What happens in the US has a significant impact on our equity market, exchange rates and long-term bond yields. Equity markets have continued to push higher following the September announcement that US quantitative easing would continue in its current form.
• Currency markets, as we have experienced since May this year, are extremely sensitive to tapering expectations, or more correctly the lack thereof at present.
• Beyond the direct impacts of exchange rates, the side effects of continuing with quantitative easing mean long-term interest rates remain at historically depressed levels

Outlook

In short, it is mostly a positive outlook. However it would be wise to tread carefully because the global stockmarkets are most likely to continue experiencing volatility and ‘mini’ economic shocks for the European and US capital markets.

For more information please email ourteam@azuregroup.com.au.

This article is intended to provide general information only, and is not to be regarded as legal or financial advice. The content is based on current facts, circumstances, and assumptions, and its accuracy may be affected by changes in laws, regulations, or market conditions.  Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group or associated entities, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused. Readers are advised to consult with qualified professionals for advice specific to their situation before taking any action.