Caution sets in as US government shutdown looms

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By Dhara Ranasinghe and Koh Gui Qing

NEW YORK/LONDON (Reuters) – Caution took hold of world markets on Tuesday, with the dollar and equities slipping and gold briefly hitting record highs on concern that a likely U.S. government shutdown could delay key jobs data.

President Donald Trump said the United States is probably headed towards its 15th government shutdown since 1981, and that his administration could make irreversible changes in such a scenario.

The dollar was broadly weaker and U.S. stocks fell as investors prepared for a shutdown to begin once a midnight deadline to craft a new funding deal passes.

PROSPECT OF U.S. SHUTDOWN PUTS SPOTLIGHT ON JOBS

A government closure would delay the issue of Friday’s key employment numbers, putting the spotlight on Tuesday’s Labor Department’s JOLTS report showing that U.S. job openings increased marginally in August while hiring declined.

This was consistent with lackluster labor market conditions that could allow the Federal Reserve to cut interest rates again next month despite resilient consumer spending.

“A full government shutdown on October 1 appears increasingly likely,” said Monica Guerra, head of U.S. policy at Morgan Stanley Wealth Management.

The S&P 500 dipped 0.15%, the Dow Jones Industrial Average lost 0.3%, and the Nasdaq Composite lost 0.3%. The lacklustre performance on Wall Street dragged on the MSCI All-World index, which was flat.

Across the Atlantic, the pan-European STOXX 600 reversed earlier losses to rise 0.5%, helped by gains in industrial and healthcare stocks, while Japan’s Nikkei closed down 0.25%. For the month, the STOXX 600 was up 1%, its best monthly performance since May. 

China’s blue-chip CSI300 Index rose almost 0.5%, set for a fifth straight month of gains in its longest such streak since October 2017.

Still, with U.S. stocks looking set to end September more than 3% higher and European shares having their best month since May, overall sentiment towards equities remained upbeat.

“We’ve actually just decided to increase our weightings in equities further,” said Shaniel Ramjee, co-head of multi-asset at Pictet Asset Management. 

“The earnings picture has recovered quite materially at the same time that global central banks are still cutting interest rates and global growth is fine.” 

Australia’s dollar added to gains after the central bank held policy rates unchanged, as widely expected. Oil prices fell over 1% on prospects of greater production by OPEC+, while China’s manufacturing activity shrank for a sixth month in September.

A SHINING MONTH FOR GOLD

Risks of a shutdown added to gold’s stunning rally. It briefly hit a new record high of $3,871.45 per ounce before trading lower on the day. It has gained over 10% in September – on track for its biggest monthly percentage gain since July 2020. 

Meanwhile the dollar was down 0.6% at 147.70 yen, the euro was up 0.3% at $1.1757, while the Swiss franc and pound were also a touch firmer against the dollar.

The dollar index was last down 0.3% on the day and set to end September little changed on the month. 

Uncertainty over the U.S. shutdown bolstered demand for 10-year U.S. Treasuries and nudged the 10-year yield down to 4.1329%.

The yen could emerge as an outperformer as a hedge to a U.S. government shutdown, ING currency analysts said in a note.

The September employment report due Friday is considered key to the Fed’s calculations for the timing of rate cuts.

A protracted government closure could leave the Fed flying blind on the economy when it meets on October 29, however.

China’s purchasing managers’ index rose to 49.8 in September from 49.4 in August, below the 50-mark separating growth from contraction.

It suggested producers are waiting for further stimulus to boost domestic demand, as well as clarity on a U.S. trade deal.

The Reserve Bank of Australia left its cash rate steady at 3.60%, saying recent data suggested inflation might be higher than forecast in the third quarter and that the economic outlook remained uncertain.

In Europe, data showing inflation rising in four key German states had limited market impact. 

Oil stayed weaker due to an anticipated production increase by OPEC+ and the resumption of oil exports from Iraq’s Kurdistan region. Brent slipped 1.3% to $67.10 per barrel and U.S. crude fell 1.3% to $62.60.

(Reporting by Dhara Ranasinghe in London and Rocky Swift in Tokyo; additional reporting by Naomi Rovnick in London. Editing by Mark Potter and Nick Zieminski)