Castlestone Management on the FTSE 100 Weakening due to the US Government Shutdown

Although markets seemed to be faring comparatively well earlier in the week at the start of the US government shutdown, as the week is drawing to its close, the strain is beginning to be felt throughout the international economy. At market open today (Friday 4^th October) London’s FTSE 100 edged lower due to pressure from mining stocks over the impasse that the US budget crisis continues to take its toll on investor confidence.

By 0736 GMT, the FTSE 100 was continuing to show the strain caused by the partial US shutdown as it was down 12 points or 0.2% at 6,436.77, off 3%; with miners off by 0.9% as cyclical shares started being sold by investors who have become wary of the risk they might be taking. At the start of the day, during the quiet early morning trading period, mid-cap stock retailer Carpetright proved to be a particularly big faller, off a considerable 9.5% after a previous profit warning .The effects are also being felt by others as downbeat comments had an effect for blue-chip sugar producer Tate & Lyle, hurting them too as they were 0.3% off after they announced that their first half profits were hampered by the cold spring weather in the United states and the slow start to the summer’s effect on their product.

Many are beginning to see the strain that the partial government shutdown; the closing of all non-essential US government services, is having on not just the US, but the international economy, as not only are consumers starting to tighten their belts in an attempt to weather out the storm, but American’s are growing more reluctant to release their capital and invest in a time where they may soon need security.  The US, despite the rise of nation’s such as China and India, is still the world’s largest economy and still fuels a large portion of international investment. It’s the domino effect; when the lynch pin domino falls, the rest feel the knock on effect.

The US government shutdown came as a result of their government’s inability to come to terms on how to pass a new US budget., According to previous negotiations in Washington D.C, the previous budget that was granted to provide capital to government institutions was due to run out on 1^st October, and in order to continue funding for those services, Congress would have to agree a new budget.

That was the problem, Congress wasn’t in agreement. The Republican controlled lower house, the House of Representatives, took the opportunity to use the deadlock to try to push forward their agenda on ‘Obamacare’ (health care being extended to every American). President Obama and the Democratic controlled Senate wouldn’t negotiate and the deadline passed.

Despite these circumstances, much more dire straits could be in store for the global economy, as the US is due to default on its debts unless it raises its debt ceiling by 17^th October. With Congress so divided, Castlestone Management reckons we may be in for a rough ride in the coming weeks, and it looks like things may get worse before they get better.