European markets commenced Wednesday with a downward trend, reflected in the German DAX index which opened marginally lower at approximately 23,770 points, a 0.5 percent decrease from the previous day’s closing level. Investor attention is keenly focused on Washington D.C., where a government shutdown took effect earlier in the day.
Analysts note that such shutdowns, a recurring feature in US history with 21 occurrences since the 1970s, typically resolve within eight days, although durations have varied significantly, ranging from a single day to a record 34 days. Initially, US equity markets are exhibiting a muted response, with modest declines but lacking substantial volatility. The DAX is mirroring this subdued performance, influenced by the US market’s trajectory.
Despite the immediate uncertainty, historical data suggests a counterintuitive phenomenon: stock markets have tended to increase during periods of government shutdown. In 12 out of 21 prior instances, the S&P 500 has registered gains, albeit modest, highlighting the potential reward for long-term investors who remain invested through such events. An individual invested in 1957 would have seen an initial investment of $1,000 grow to approximately $83,000.
A potential consequence of the shutdown could be a delay in the release of the crucial jobs report scheduled for Friday. This report is highly anticipated by investors in both New York and Frankfurt, particularly given the strong expectations surrounding potential Federal Reserve interest rate cuts. The absence of this data, even for a short period, disrupts established economic rhythms and can contribute to increased market volatility.
Technical analysts are currently observing the DAX operating within two overlapping trading ranges – a lower range established in September and a higher range observed during July and August. The key determination will be which range the market prioritizes. While the DAX briefly breached the lower range on Tuesday, a sustained upward movement, requiring the index to surpass 23,950 points while maintaining support around 23,800, would be necessary to propel it into the higher trading range, potentially adding around 450 points.
The euro strengthened slightly Wednesday morning, trading at $1.1777, with a dollar fetching €0.8491.
