US budget crisis had little market impact on the way in or out
The Fed's stance on quantitative easing is a bigger issue than the US government's brief shutdown and near debt default, analysts say
As far as market crises go, the United States government shutdown was a damp squib.
Regional investors barely reacted yesterday to the resolution of the budget stand-off - the Hang Seng Index was down 0.57 per cent - and they were not too stressed about the shutdown as it played out.
This was despite warnings that a budget impasse threatened a US default on government debt, which prompted investment banks heads such as Jamie Dimon (JP Morgan) and Anshu Jain (Deutsche Bank) to warn of a "catastrophic" outcome for global markets.
Since the shutdown began on October 1, the Hang Seng Index has gained 1 per cent.
More intriguingly, Asian issuers have brought US$25 billion of G3 bonds to the market since the start of September, according to Thomson Reuters. These include a US$3.5 billion bond from mainland energy firm Sinopec that arrived in the thick of the impasse, and a US$2 billion bond from Asian Development Bank. These offers and many others were well received by the market.
By way of reference, over the past seven weeks, as the budget crisis loomed and then hit, Asian issuers pumped out about five times the volume of G3 bonds than seen in the previous three months. Asian bond markets have gone through an extraordinarily active issue patch that was at odds with alarmist talk of a US government default.
"We have not seen a dramatic move in the credit markets. Spreads did not widen much - a few basis points at most," said Frank Kwong, the head of the Asian fixed-income syndicate at BNP Paribas. "The credit market did not think [the US government shutdown] was a major event."
Investors were also much more focused on an impending winding down of quantitative easing by the US Federal Reserve.
"Fed tapering is the bigger issue for the market rather this very temporary issue of the government shutdown," said Grace Tam, a global market strategist at JP Morgan Asset Management.
The Fed held off on making any changes to quantitative easing - by which it buys US$85 billion of bonds each month - while the government was shut down and was unable to issue new economic data. Key data releases that were delayed included non-farm payroll numbers (which were to have been released on October 4), retail sales (October 11) and consumer price inflation data (October 16), among others.
Fed Beige Book data released on Wednesday - a snapshot of the US economy in the absence of regular data releases - indicated the economy was strong but that the budget impasse had created uncertainty.
It showed price and wage pressures remained in check, with consumer spending up slightly.
"There was an uncertainty impact and it was a difficult economic environment for slowing the easing phase," said Klaus Baader, the chief Asia-Pacific economist at Societe Generale.
In other words, tapering got a reprieve, which ironically was a positive for markets, particularly debt markets.
Bankers said Asian issuers were so busy issuing bonds since the start of September partly because they wanted to push out as much issuance as possible before the tapering regime kicked in.
The markets will now have to digest a lot of US economic data that was delayed during the shutdown. This will come in bunches, and people do not yet know when. That uncertainty perhaps explained why the Hong Kong share market had a small sell-off yesterday.
And of course the budget crisis is not resolved, merely postponed. The suspension on the debt ceiling agreed to yesterday ends on February 7. The end of the suspension may set off a fresh political showdown and perhaps another government shutdown.