The US government entered a shutdown on Wednesday, sparking broad debate across global markets as investors assess the potential repercussions for the wider economy.
Although government shutdowns typically have only a modest impact on capital markets, the timing of this one is critical. The release of US jobs data scheduled for Friday will be delayed — casting a shadow over the Federal Reserve’s outlook just weeks ahead of its next meeting. President Donald Trump also threatened to use the shutdown to carry out a “large number” of public-sector job cuts.
With no clear path to an agreement, there is no visibility on how long federal offices will remain closed. During Trump’s first term, the country experienced what became the longest partial shutdown in history.
On Wednesday, US risk assets were affected. Gold — traditionally viewed as a safe haven during economic or geopolitical turmoil — rose to set its 39th record high this year. European equities gained in midday trading after a muted open, while Asian equities delivered a mixed performance. In global bond markets, activity eased after European government bond yields rose early in the session, while the 10-year US Treasury yield fell 4 basis points after a surprise dip in private payroll data.
Concerns Over “American Dysfunction” Push Investors Toward Alternatives
Luke Bartholomew, Deputy Chief Economist at abrdn, said the shutdown adds to concerns about the credibility of US institutions, fiscal stability, and political “dysfunction.”
Speaking to CNBC’s Squawk Box Europe, he noted: “What strikes me is how much political capital the Trump administration seems willing to spend in an attempt to ‘reform,’ if you will, the Federal Reserve and exert influence.”
He added: “The Fed is ultimately the cornerstone institution of global capital markets. That puts the entire long-term yield curve under pressure, and I expect this to continue. That said, I would be surprised if markets did not eventually look through it.”
Neil Birrell, CIO at UK-based Premier Miton, said a prolonged shutdown could dent risk sentiment in global markets.
“With bond markets reacting to excessive government borrowing needs, tight credit spreads, and equities at stretched valuations, it’s no surprise investors move into safe assets when hit by a negative shock like a US shutdown,” he explained.
He added: “Investors have been complacent about the risks we face, and negative surprises will trigger reactions. Any form of diversification now looks attractive — including silver, cryptocurrencies, and potentially other commodities.”
Impact on Foreign Exchange
Joe Brusuelas, Chief Economist at RSM US, noted that the most immediate impact of the shutdown may be increased pressure on the US dollar or influence on the Fed’s October rate decision.
He wrote in an email to CNBC on Wednesday: “In most cases, US government shutdowns lead to a modest wave of speculative behavior among global investors around rates and currencies. This version of America’s fiscal drama is no different.”
“For there to be a more significant impact on global markets, the shutdown would need to last the entire month and approach the record set in 2018–2019. If that happens, it would likely influence the Fed’s policy decision later this month, which in turn would affect global capital flows, interest rates, and currency values.”
He also warned that widespread federal layoffs “could further depress the dollar, prompting capital flows into the euro and yen.”
Brusuelas added that such layoffs could indirectly hurt European industry:
“Demand for European exports such as automobiles would fall significantly, adding pressure to Germany’s industrial sector.”
UBS: Investors Should “Look Past Shutdown Fears”
Still, Swiss bank UBS said in a Tuesday note that it does not view the shutdown as a major market risk, while acknowledging it is not a welcome development for global investors.
UBS analysts wrote: “Previous shutdowns have had only limited effects on markets. Historically, they caused minor and short-lived volatility in equities and bonds, as investors understand the economic impact tends to be small and temporary… Treasury auctions and payments will continue as normal, and while IPO activity and some regulatory functions may pause, we do not view these as posing systemic risk to market stability.”
They added that any temporary delays in economic data “will not derail the Fed’s ongoing easing cycle.”
“The shutdown will halt the collection and publication of most government data and will affect revisions to past labor market figures, which have recently gained importance… This means the Fed may have to decide in October without updated labor data, but we do not think that will prevent another 25-basis-point cut.”
According to CME’s FedWatch tool, money markets are strongly pricing in a 25-basis-point rate cut at the Fed’s October 29 meeting.
UBS concluded: “We advise investors to look past shutdown concerns and focus on other market drivers — continued Fed easing, strong corporate earnings, AI investments, and their growing returns.”
