Government shutdowns not having much of an impact so far on equity sentiment

The US Government shutdown had no impact on US equity markets; however, it did attract some buyers of US Treasury securities. Equity markets are likely taking the view that any shutdown will be brief and have a limited economic effect, so there is not much to concern themselves with. A more prolonged shutdown may have more implications. One immediate problem is that official economic data releases will be suspended until the government reopens. And the final quarter of another year begins, with the focus shifting to earnings season, where another healthy rise in corporate earnings is anticipated. Markets are driven by corporate profits, monetary policy, and not a temporary pause in government funding.

The discussion surrounding equity market bubbles continues; the current US market valuation reflects expectations of a structural productivity boom driven by AI. As one report I read yesterday pointed out, valuations do not burst bubbles; they are burst by a lack of liquidity to fund expectations. Mckinsey projects that global AI-related data centre and compute investments could reach up to $ 7 trillion by 2030, with $ 2.7 trillion in the US alone- a huge sum to find. A wobble in the Treasury market that resets the economics of the capital structures underpinning, in this case, AI finance, would have serious consequences for funding this investment. Recently, Treasury markets have stabilised, with increased buying at the longer end of the curve. There has even been some modest interest in UK gilts. However, it is fair to say that another shakeout in the Treasury market would affect US equities, particularly AI-related investments. The markets seem happy to concern themselves with this on another day.

Later today, we will receive the Composite PMI for the UK economy. The index is forecast to fall to 51, from 53 last month, coming closer to the 50 mark that separates expansion from contraction. As for today stocks are expected to start on the front foot again.