U.S. Government Shutdown “Set to Break Records”; Markets Already Struggling—Could Thursday Be the “Turning Point”?

U.S. Government Shutdown “Set to Break Records”; Markets Already Struggling—Could Thursday Be the “Turning Point”?

The US government shutdown is pushing financial markets to the brink of danger, but there are hidden opportunities in the crisis. Signals have emerged that negotiations between the two parties in Congress are making progress, and some Republican lawmakers optimistically predict an agreement could be reached this week.

On Tuesday, the US market experienced a "Black Tuesday." Warnings from Wall Street bank CEOs about overvalued US stocks fueled investor anxiety, combined with concerns that the shutdown could worsen the liquidity crisis, leading to a large-scale sell-off of risk assets. The Nasdaq and S&P 500 recorded their biggest single-day drops in nearly a month, with technology and semiconductor sectors being hit hardest.

Panic quickly spread to other markets. Bitcoin fell below the $100,000 mark for the first time since June, triggering over $1.3 billion in liquidations across the cryptocurrency market. Safe-haven sentiment pushed the US dollar index higher for the fifth consecutive trading day, reaching a three-month high, while the British pound, offshore yuan, and commodities came under pressure.

At the core of this market turmoil is Washington's political deadlock. On Tuesday, the current US government shutdown entered its 35th day, tying the record set during the 2018-2019 shutdown.

However, according to media reports, some Republican lawmakers predict the deadlock may end this week. Markwayne Mullin, a Republican senator from Oklahoma, stated that he is "very confident" an agreement will be reached this week, specifically noting, "I think we could finish tomorrow (Wednesday) night... but it’s more likely to be Thursday."

"Shutdown Equals Rate Hike": Liquidity Crisis Emerges

Behind the market's sharp volatility is an increasingly severe liquidity crisis, with the government shutdown seen as the main culprit.

According to a previous article by Wallstreetcn, analysis shows that the shutdown forced the US Treasury to boost its balance in the Fed's General Account (TGA) from about $300 billion to over $1 trillion in the past three months, hitting a five-year high. This process essentially withdrew over $700 billion in cash from the market.

This massive liquidity extraction has a tightening effect equivalent to several rate hikes. Key funding rate indicators are all under stress. According to Bloomberg, the Secured Overnight Financing Rate (SOFR) surged by 22 basis points on October 31, well above the Fed’s target range, indicating that actual market borrowing costs haven’t declined in step with Fed rate cuts. Meanwhile, use of the Fed’s Standing Repo Facility (SRF) is nearing historic highs.

Data shows that US bank reserves at the Fed have dropped to their lowest level since early 2021. Bank of America liquidity experts Mark Cabana and Katie Craig warn that worsening funding conditions may exhibit dangerous self-reinforcing characteristics. Without intervention, it could trigger a crisis similar to the repo market turmoil in September 2019.

Breakthrough on Thursday? Parties Show Signs of Progress

Despite mounting market pain, the political deadlock appears to be nearing a "turning point."

According to media reports, with the shutdown at a record 35 days, some senators predict the stalemate may end this week. Markwayne Mullin, a Republican senator from Oklahoma, expressed he is "very confident" an agreement will be reached this week, specifically noting, "I think we could finish tomorrow (Wednesday) night... but it’s more likely to be Thursday."

Mullin and other Republican senators believe Tuesday’s local elections are a key factor. They say Democratic leader Chuck Schumer previously instructed his members to refrain from voting to avoid suppressing liberal voter turnout. Eric Schmitt, a Republican senator from Missouri, predicts that after the elections, Democrats will no longer have reason to obstruct.

The shutdown's impact on people’s livelihoods is becoming increasingly clear, bringing enormous pressure to both sides. The Financial Times reports that funding for the "Supplemental Nutrition Assistance Program" (SNAP), relied on by over 40 million Americans, expired last weekend, and some local preschool programs for low-income children have also been closed. Analysts from Goldman Sachs and Citigroup likewise predict that the government is likely to reopen within the next two weeks.

Democratic Party Divisions Emerge

However, the road to an agreement is not smooth, as clear divisions have emerged within the Democratic Party.

According to media reports, some moderate Democrats, unable to endure the pain caused by the shutdown, are considering accepting a compromise: passing a temporary funding bill to reopen the government in exchange for a Republican promise to vote on extending Affordable Care Act (ACA) subsidies in the future.

But this "reopen first, vote later" plan has angered the party’s progressive wing.

Vermont senator Bernie Sanders bluntly stated that if Democrats "give in" on this issue, it would be a "betrayal of millions of working families." Connecticut senator Chris Murphy also said that believing a party that currently opposes extending subsidies will change its position in a month is nothing short of “self-deception.”

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