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What is the US Government Shutdown, Debt Ceiling? Impact on the World Economy

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President Barack Obama addresses media in
the Rose Garden of the White House in Washington.
Picture: AP Photo, Evan Vucci

What is the US government shutdown?

In U.S. politics, government shutdown occurs when U.S. Congress is unable to authorize funding for various government operations. Government stops all the services except few essential ones. About 800,000 out of 2.1 million federal employees have been sent home on an indefinite unpaid leave. Essential federal services that are working now includes armed forces, federal medical services, National Weather Service, etc.

Why the US government shutdown occurred?

The US budget year ends on September 30. The Democratic controlled Senate and the Republican controlled House of Representatives are considering bills to fund the government past the deadline. However, the Republicans are not agreeing to the funding for President Obama’s healthcare law. Republican controlled House of Representatives wants changes to the implementation of the Patient Protection and Affordable Care Act, whereas President Obama wants to sign into a law a budget proposal without those changes.
US Government Shutdown - Lincoln Memorial
Lincoln Memorial closed, photo by Rich Renomeron

How will it affect the US economy?

Goldman Sachs estimates that a three-week shutdown would slow down the annual economy growth rate in the Oct-Dec quarter by up to 0.9-percentage point. Moody’s Analytics estimated that a shutdown of three to four weeks would cost the economy about $55 billion. Lost wages of federal employees will amount to about $1 billion a week.

How will it affect the world economy?

Economists believe if the U.S government shutdown lasts long, then it will be more likely that the Federal Reserve will delay reducing its monetary stimulus program. This will boost emerging markets at the expense of the dollar. 
Most of the countries including India and Canada are not worried as the shutdown enters its second day. What worries the major economies is debt-ceiling negotiations and FOMC (Federal Open Market Committee) meet which is due later in the month of October.
US Government Shutdown - National Park
National Park Shutdown, Photo by Rich Renomeron
Most Asian markets, which generally react immediately after any event in US, have stayed stable since the government shutdown. Indian Sensex in fact rallied over 300 points in the early morning trade today (Thursday) led by IT, metal, autos and capital good stocks. Indian business executives told Voice of America that they could not understand how a developed country like the U.S. could shut down its government because of a legislative impasse.
China, UK and Germany issued travel advisory for their citizen in the wake of government shutdown, saying that tourists might face inconvenience and delays.
In an interview to Voice of America, Professor Chen Qi at the Carnegie-Tsinghua Center for Global Policy in Beijing said, if this had happened in another country, it might be more problematic. Maturity of the U.S. government and American politicians is trustable and will ‘have the wisdom to come to a consensus and solve this issue smoothly,’ especially since they have been down this road numerous times previously.”
It is a bad start, but things may get even worse should the two sides (Republicans and Democrats) fail to agree on raising the $16.7 trillion debt ceilings by the 17th October deadline. 

What is Debt Ceiling? Why the U.S. and major economies are worried?

Debt ceiling is like a self-imposed debt limit or borrowing cap implemented to keep monitoring the government spending. Since the government does not make enough through taxes to cover the costs, it needs to borrow money to pay all their bills. 
If politicians again fail to reach to an agreement, the government will be unable to borrow, leading to an immediate 32% cut to spending on services like social security, FBI, infrastructure development, weather, food stamps etc. In this case, Treasury will have to prioritize some payments and services over others. It will be a tough decision as government makes about 100 million payments each month. 
U.S. economy is the largest economy in the world responsible for 25% of the global economy. If all the analysis, worries and fears comes to be true, then it would change everything for the first time. The world might see another global financial crisis only because the two political sides did not agree with each other. 

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Sanskar Shrivastava is the founder of international students' journal, The World Reporter. Passionate about dynamic occurrence in geopolitics, Sanskar has been studying and analyzing geopolitcal events from early life. At present, Sanskar is a student at the Russian Centre of Science and Culture and will be moving to Duke University.

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Economy

How to Trade Shares for Beginners

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Although expectations had been modest for 2019, the stock markets around the world had been active in 2019 and the positive returns seen so far have exceeded even the most optimistic expectations. Supported by easy monetary policies around the world, as well as by positive economic expectations for 2020, stocks continue to move, which makes a significant number of people deciding to start investing. Since stock trading is much harder than most of them think, let’s see some of the most important things beginners must consider in order to accelerate their learning curve.

Stick with the most liquid shares

Finding “the next big thing” is one of the illusions that seduces most of the beginners. They spend a significant amount of time looking for those companies that will have huge returns over the next months of years. Not even the most-skilled stock traders are able to do that, so why do you think you will?

Instead of looking for those shares, stick with the companies that already have a leading position in the industry. Google, Facebook, Microsoft, Apple, and Boeing are just some of the names that are popular at the time of writing, and looking at their performance in the long run, so far, they’ve managed to impress.

Study educational materials

Beginners fail to understand that share trading is a skill-based endeavor and study is one of the most important parts of the process. Study as many educational materials as you can and gain as much knowledge as possible because you’ll definitely need it. This guide and other similar ones will introduce you to share trading and help you understand the basic concepts. Remember this axiom: “Around 90% of the traders lose 90% of their capital in their first 90 days of trading”. Education is one of the main factors why beginners stumble into the same mistakes over and over again. You don’t want to be in the same position as most of the people who don’t learn and spend time to sharpen their skills.

Build a portfolio

Closely linked to our first tip, building a portfolio of uncorrelated assets is one of the most important things to consider, if you want to limit the damages of your mistakes. No matter how good you are, in trading, you won’t make money all the time. Diversification will help you minimize the effects of some losing trades. Don’t concentrate all the risk in a single stock and instead pick at least three or four names that might perform positively in the near-term.

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Economy

Saudi Arabia halves oil production: How long will it last, and will it affect oil prices?

Saudi Arabia announces it will halt 50% of its oil production. This Vestle news article will explore the possible financial impact.

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saudi halves oil production

Since recent drone airstrikes crippled Saudi Arabia’s Aramco oil processing facility in mid-September, the country – the world’s No. 1 exporter of oil* – has been forced to close half the plant while reconstruction takes place. While no casualties resulted from the attack, the real harm is finally coming to light, as the impact on Saudi Arabia’s oil industry is becoming clearer. This Vestle news article explores this important topic.

Aramco estimates that the closure will affect almost 5.7 million barrels of crude oil per day, which amounts to roughly 5% of the world’s daily oil production. To help you put that into perspective, consider that Saudi Arabia produced 9.85 million barrels a day in August 2019. And it’s not just oil production that will suffer. Saudi Energy Minister Abdulaziz bin Salman also indicated that the closure has forced a temporary halt in gas production, limiting the supply of ethane and natural gas by 50% as well.

One particular detail that those with an eye on the financial markets might find interesting is that the attacks took place at a time when Saudi Arabia continues to progress toward taking Saudi Aramco public – a first for the kingdom’s global-reach energy sector. How much money are we talking? As the world’s most profitable oil company, it’s estimated to be valued at around $1.5 trillion.**

Will this affect oil prices?

The short answer, according to some people, is probably yes. With Saudi oil output expected to dip below 50%, the outages present “an extreme risk situation for oil,” according to Paul Sankey, managing director for Mizuho Securities. However, measures have already been put into place. Depending on how long it takes for Saudi Arabia to recover the damaged facility, OPEC (the Organization of Petroleum Exporting Countries) is aiming to suspend production cuts to help temper the impact of the ongoing crisis. On the trading side, the International Energy Agency is expected to release strategic oil stocks, and US President Donald Trump has already authorized the release of oil from the US petroleum reserve.***

In the weeks just after the drone strikes, the price of WTI Oil on the Vestle platform showed a 13% increase, followed by a 12% decrease over the following two weeks. Also during that time, Bloomberg reported that the spread between WTI and Brent widened to 37%, which could be an indication that the oil spike might affect global prices more than other oil giants, such as the United States. Furthermore, a representative from Goldman Sachs estimates that the global benchmark for Brent Oil could rise above $75 a barrel if the plant shutdown lasts for more than six weeks.****

Will it get any worse?

Some people fear the Aramco incident represents the potential for a broader regional conflict that could escalate to the point that it affects Gulf oil production as a whole. CFRA Research oil analyst Steward Glickman said, “Oil prices are now likely to bake in a much higher geopolitical risk premium than had been absent in much of 2019.” With the recent bombing in June of oil tankers in the Gulf of Hormuz not so distant, it’s no wonder some analysts like Glickman like are raising their eyebrows. ***

Considering all the different factors that play into this situation—the global, financial and geopolitical—there’s no telling what kind of turns it will take. The only thing to do is keep an eye on the news for the political side of it, and financial sites like Vestle to see what kind of ripples such an event is making in the financial markets.

Oil prices and the financial markets

Volatility such as that recently experienced by both WTI Oil and Brent Oil can present both opportunities and risks for informed traders, such as those who invest in Contracts for Difference or CFDs, which essentially means trading on the price movement of a particular instrument without owning the underlying asset. At Vestle, you’ll find hundreds of tradable CFD instruments, from commodities like oil and natural gas to popular stocks, indices, ETFs and crypto. And thanks to a selection of trading signals, market indicators and our economic calendar, access to important financial info for global situations like this is right at your fingertips.

 Sources

*https://edition.cnn.com/2019/09/12/investing/us-oil-exports-saudi-arabia/index.html

**https://www.cnbc.com/2019/09/14/saudi-arabia-is-shutting-down-half-of-its-oil-production-after-drone-attack-wsj-says.html

***https://eu.usatoday.com/story/money/2019/09/16/saudi-arabia-oil-attack/2341141001/

****https://www.bloomberg.com/news/articles/2019-09-15/oil-prices-jump-19-after-attack-cuts-saudi-arabian-supplies

Vestle (formerly known as ‘iFOREX’) is the trading name of iCFD Limited, licensed and regulated by the Cyprus Securities and Exchange Commission (CySEC) under license # 143/11. The materials contained on this document have been created in cooperation with Vestle and should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument, in any manner whatsoever. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83.7% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Any indication of past performance or simulated past performance included in this document is not a reliable indicator of future results. Full disclaimer: https://www.vestle.com/legal/analysis-disclaimer.html

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Economy

Fears of a 2019 European Economic Slowdown Loom

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EU flag

Although the spotlight is on the trade war between the United States and China, one aspect that is currently ignored by the media is represented by signs of weakness in the European continent.

Germany slows down

After posting a -0.3% GDP contraction in the third quarter of 2018, the economic indicators released from Germany in 2019 cannot support a positive economic picture. The manufacturing sectors continue to show signs of weakening, with the Markit PMI Composite now at 51.6, down from 52.3.

Industrial Production had been contraction by 1.9% in November, and both imports and exports had been down by 1.6% and 0.4%, respectively. DAX trading had also suggested there is growing concerns among investors and the main German stock index peaked out in July 2018, being now down by 15%.

Germany relies mostly on exports, being the third exporter in the world, only surpassed by the United States and China. That is why the weakness we see in Germany is actually a symptom of what’s happening in other European countries as well.

Italy and France not too encouraging

The new populist government in Italy, formed by La Lega and The Five Star Movement faced a serious challenge to get the EU’s approval for the 2019 budget, as the already high debt-to-GDP ratio (currently at 131.8%) raises concerns on whether the country will be able to meet its debt obligations in the future.

There are also serious concerns about the banking sector, which despite mergers and acquisitions, and huge capital available from the ECB, were unable to solve their problems which emerged after the 2008 financial crisis. The future of Italy is very uncertain, and analysts predict that the new government will not be able to meet their economic promises, given that we are at the end of a business cycle.

Speaking of France, the problems are social at the present time. President Macron was unable to stop the “Yellow Vests” protests, despite promises to increase the minimum wage and the overall standard of living for the very poor. France’s debt-to-GDP ratio currently stands at 97%, but given the latest promises, there are concerns whether the country will manage to keep the budget deficit below 3% in 2019, as the European treaties demand.

Although there’s a single currency in Europe, in terms of fiscal policy things were very fragmented, which is why the economic recovery had been very slow and the reason why investors predict Europe will face the greatest challenges to solve its economic, political, and social problems.

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