Risk appetite is on for the start of the week, thanks to two major developments over the weekend. The one that is getting the most headlines, of course, is that the US Senate has finally broke the political gridlock on spending. That means measures that could lead to an end to the US government shut down – now the longest in history – can move forward. The government could reopen as soon as later this week, as a matter of fact.
The other event that has traders optimistic is a series of de-escalatory moves by US and Chinese officials around trade. China postponed restrictions on exports of certain key rare earth minerals, while the US dropped trade investigations into Chinese shipping that would lead to increased fees. These measures essential reversed the escalation between the two countries back in October amid the trade negotiations ahead of the Trump-Xi summit. Markets are relieved to see that the direction in the US-China relation is still positive for trade, including lowered tariffs.
What Does the Senate Deal Mean for the Markets?
Stock markets are up around the world, indicating a surge in risk appetite. Normally, that’s negative for a host of safe haven assets, such as the dollar and yen. Gold is an interesting case, as the yellow metal has popped back above the $4,000 per ounce level. Traditionally it’s a safe haven asset, but withe de-dollarization trend, demand has been strong, particularly from China. If the Asian giant’s economy is set to prosper amid improved trading conditions, presumably its purchases of gold would remain steady or increase.
However, some of the initial enthusiasm could quickly fade. The US government is still not open, and there are several hurdles that yet need to be crossed. Even if everything goes right, the earliest a bill to fund the government could be passed would be Wednesday. In the meantime, the negative consequences of the shutdown keep piling up. That includes aircraft delays, slower economic growth from limited government spending, and the real possibility that political pressure could resume and no spending bill actually gets approved in the near term.
Why is the Senate Agreement So Important?
What happened over the weekend is that a small number of Senate Democrats broke ranks with their party and agreed to support a test vote on a partial spending bill. The bill would allow funding for major parts of the government, such as military and the FAA, but isn’t a full annual budget. They also only agreed to support the test vote on condition that a later vote to fund ACA (also know as Obamacare) subsidies. Those subsidies are the major point of contention, with Democrats trying to use the leverage of the government shutdown to reinstate the subsidies that are set to lapse as a result of the “Big Beautifull Bill” passed earlier in the year.
Those Democrats breaking ranks naturally incurred the ire of their colleagues, and might not continue to support further measures. However, passing of the vote allowed for legislation to be approved with a lower voting threshold, and Republicans could potentially get a bill approved without further Democrat support. It just would have to pass through more procedural hurdles. The real test comes with the House, where Republicans have a razor-thin majority. After the modifications done in the Sentate, it’s not a sure thing the spending bill will pass the House. That vote could happen any time this week, and markets could stay nervous about the prospects of a government reopening until then.
