Global Macro: Shutdown Brings Volatility

TheStreet.com

NEW YORK (TheStreet) -- The second day of the U.S. government shutdown on Wednesday brought more volatility to markets than the day before.

Trading began in the New York session with a strong selling in the U.S. dollar, large buying in the long-dated Treasury bond and quick drops in equity indices.

Although lasting macro consequences such as default on Treasury debt are unlikely, the polarization in Washington reveals troubling truths. A nation with a government unable to accomplish even the smallest of tasks doesn't bode well for the fiscal or monetary future of that country.

The global economy is on a gradual path to recovery, with some overhead resistance from structural issues. The introduction of an avoidable geopolitical risk complicates things further.

The first chart below is of iShares Barclays 20+ Year Treasury Bond .

The long-dated Treasury bond is in an upward trend for various reasons. The Federal Reserve's commitment to buying Treasuries is a main one, while the political issues in Washington are also aiding in the move higher. The debt has been a safe-haven place to invest funds, and as was seen Tuesday, large bids can flow in quickly when investor fear spikes.

The long bond presents an attractive asset as long as geopolitical risks remain, and the bond is also somewhat safe from drastic selloffs due to the Fed's purchases.

The next chart is of the USD/JPY currency cross.

The dollar had a broad selloff against various currencies Wednesday morning. The higher bond prices weighed down interest rates which was negative for the dollar. Similarly, the dollar was sold because investors were wary of holding risky U.S. assets. One might question under that logic why weren't Treasuries sold as well.

The answer is that even with a crisis, U.S. debt is among the safest and most creditworthy investments, which leads to large investor bids.

The long dollar advocates prior to the September Fed meeting are far gone now, and as long as the debt ceiling remains an issue for financial markets, the dollar and equities are vulnerable to sharp corrections lower.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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