US government shutdown explained: What it is and how does it impact financial markets?

The US government is in the news again, not for imposing tariffs but for failing to shut down. The US government shuts down for the first time in 6 years. The shutdown means the government is running out of money for funding its operations. This occurs when Congress fails to pass the necessary appropriations for bills. The US shutdown has wider implications on the US economy and indirectly impacts global markets.

What is US government shutdown?

The current shutdown is primarily due to democrats non-approval to pass the continuing resolution (CR) to fund the federal government before the midnight. The dispute arised between the minority Democrats and the majority Republicans over healthcare policies attached to the spending bills. The democrats refused to support the CR as it excluded discussing provisions to address the expiring Affordable Care Act subsidies and reverse the medicaid cuts.

What impact does shutdown has on US economy?

The shutdown leads to temporary stoppage of non-essential expenses linked to scientific research,customer service and non-essential activities. Meanwhile, essential services like border security, active military, TSA agents, air traffic controllers and other law enforcement must continue working without pay until shutdown ends. Additionally, the initial estimates suggest nearly 7,50,000 employees are estimated to furloughed (sent home without pay) adding worries of higher unemployment. The Congressional budget estimates suggest that, shutdown costs go upto $400 million per day loss in compensation.

How does it impacts global markets?

The US markets are expected to open with deep cuts on Wednesday as the US market futures indicate. The NASDAQ futures trade 170 points lower, Dow Jones futures fell 220 points and S&P500 also fell 0.5% on Wednesday afternoon. Markets anticipate higher unemployment, cuts in GDP could lead to more rate cuts.

The uncertainty has also raised investor preference to the safe haven assets like gold and silver. The gold prices trade at record high levels of $3,873 per ounce and little shy of hitting $3,900 per ounce. While silver prices are trading at 14-year high levels of $47.2 per ounce. Analysts at Goldman Sachs estimate gold prices to hit $5,000 per ounce levels in coming months due heightened uncertainty.

To summarise, the US government shutdown is likely to worsen economic situation in the US, with increased unemployment and steady inflation. Investors and market participants now look to park incremental flows to safe haven assets like gold and silver, instead of the US treasuries. The impact of the shutdown to aggravate further if the deadlock continues for weeks.