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Gridlock raises fear of lengthy US shutdown

Thursday, 3 Oct 2013 | 1:21 AM ET
Washington, DC - October 2
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Washington, DC - October 2

As the gridlock in Washington over U.S. budget negotiations continues, market perceptions about just how long the government shutdown could last are starting to change.

"Investors who were initially convinced that the political stalemate [would] be short-lived are starting to question if this could be similar to the government shutdown in 1996, which saw 1.4 percent of GDP [gross domestic product] shelved as federal agencies closed for 21 days," Desmond Chua, an analyst at CMC Markets, said in a research note.

(Read more: Obama: 'I am exasperated' over gridlock)

When the U.S. government officially went into a partial shutdown on Tuesday, putting almost 800,000 federal workers on temporary unpaid leave, many analysts believed U.S. lawmakers would quickly find a way to end the budget impasse.

Is President Obama 'down in the mud'?
Debating whether President Obama is engaged enough with the negotiations, with Democratic strategist Chris Kofinis, and Jim Pethokoukis, American Enterprise Institute. "Barack Obama believes he is a transcendent world historical figure," says Pethokoukis.

But as another day passes without a deal, the prospect of a long shutdown with negative repercussions for the economy is growing.

"I've seen estimates of as much as half a percentage point off [of] GDP [for] each week there is a shutdown – that could delay the recovery, it could delay an acceleration of the stock market in 2014 and it could delay [the Federal Reserve's] tapering," Bob Iaccino, chief market strategist at TopstepTrader.com told CNBC on Thursday.

(Read more: the government shutdown probably kills the 'Octaper')

Market reaction?

So far, the failure to break the budget deadlock has had a limited impact on global stock markets.

The S&P 500 has dipped just 0.14 percent over the past five days, while the FTSEurofirst 300 stock index of pan-European shares is down a similar amount and the MSCI index of Asia shares outside Japan is just over 1 percent lower.

U.S. President Barack Obama said on Wednesday that Wall Street should be worried about what is going on in Washington.

Meanwhile, a meeting between Democrat and Republican lawmakers late Wednesday ended with no breakthrough in how to take the budget negotiations forward. Republicans have tied passing a budget bill to delays in key portions of Obama's healthcare law.

(Read more: Sen. McConnell: White House meeting 'unproductive')

"The shutdown did not trigger negative shock waves across the board [on Tuesday] as markets expected the issue to be resolved quickly. However a shift in expectations is taking place," said Mizuho Corporate Bank Market Economist Vishnu Varathan in a note.

"With no clear calendar outlined for the next round of negotiations, there are reinforced speculations that the fiscal overhang may be longer than expected," he said.

Sen. McConnell: Fighting for important principles
Sen. Mitch McConnell (R-KY) discusses the negotiations in Washington to get a budget passed, as well as keep a lid on government spending.

The U.S. government shutdown has closed landmarks such as the Grand Canyon and stopped the release of some key economic releases.

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Wither the dollar

In a sign of growing fears that a U.S. shutdown could drag on, the U.S. dollar fell to a fresh eight-month low against a basket of currencies on Thursday.

The dollar index, a measure of the dollar's value against the currencies of the U.S.'s major trading partners, fell to a low of 79.74.

(Read more: Dollar shorts get louder as shutdown continues)

"Crucially, if the 'shutdown' stalemate rolls over into a debt ceiling crisis, negative implications will quickly turn global," said Mizuho's Varathan, referring to an upcoming discussion on extending the limit for U.S. government borrowing.

U.S. Treasury Secretary Jack Lew has said that the U.S. will exhaust its $16.7 trillion borrowing authority by October 17.

"If there's one bright spot… It's that the shutdown pushes the focus on the negotiations about the debt ceiling and with every day that passes we think it's likely that both issues will be tackled at the same time," said Hartmut Issel, head of CIO wealth management, for Asia-Pacific at Swiss Bank UBS.

—By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC

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