Government Shut Down Effects on Markets

By Gerard Mastra (BT)
10-1-2013

As many of you know the U.S. Govt. is officially partially shut down. Many people are wondering how the Government shut down effects on Markets will play out. This shut down will cost America a good amount of money as productivity will be halted in some Government entities. It is estimated by the Office of Management and Budget that two government shutdowns in 1995 and 1996, costs the federal government $1.4 billion. That's over $2 billion in today's dollars on costs. We must also consider this shutdown is mental more than anything. It is an 'energy draining hit' to anyone who wants to go to work, but can't because of this shutdown.

The proximity of a coming fight over the U.S. debt ceiling - borrowing authority will run out on Oct. 17, this could increase the market's reaction to a shutdown as financial institutions lose confidence in the federal government. So what happened in the past when the Government has shutdown? Well economic research shows that the the median change for the S&P 500 is a gain of 0.1 percent in the last 11 cases of a federal shutdown, this hardly seems to be such a big deal right?

Well I differ in opinion. I feel in the past the economic book in the 90's was not in bubble proportions, today we are well overvalued on many fronts, with one exception 'The U.S. Dollar'.  I expect the USD to continue its slide as investors and traders get fed up with this current administration and their lack of diplomacy among their constituents.  For this reason I have made it clear that I am bearish on the USD and Bullish on the YEN.

Government Shutdown Effects on Markets -  Japanese Yen

Typically the Japanese Yen is known for its safe haven status. In the last year, this is not necessarily the case, as Japan worked rigoriously to devalue their currency, thereby making them much more competitive in the Global markets. This cycle, I feel has already taken place. At the moment the USD/JPY is at 97.88, this is more than its fair value. I feel the YEN is much weaker than it should be based on this Countries low unemployment and recent growth in corporate earnings. I know many point out that Japan has a considerable amount of debt at 10% GDP, however they have been taking strong measures over the last year to counteract their stagnate economy.  Last night Japanese PM Abe’s decision announced Japans sales tax to increase to 8% from 5% in April. Note that later on PM Abe did confirm a stimulus package of JPY 5trl, however this was in line with expectations.

Technical Data and how the Government Shutdown may influence USD/JPY

So how will the Government Shutdown Effect Forex? At the moment I am short the USD/JPY.  As i tweeted earlier in the private members section in twitter as well as the public twitter, I was clear that I was short on the USD/JPY.  At the moment we have several Bearish patterns on different time frames. This head and shoulders pattern is visible on the 30 minute chart however below this you will also see one on the daily chart.

Here is the daily chart on the USD/JPY you will see there is a  clear head and shoulder formations visible in this chart as well.

Here is an interesting video. They are telling us not to be scared of a shutdown, I differ in opinion.
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