Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

Analysts Say Brace for a Steeper Plunge as Shutdown Drags On

Published 25/12/2018, 12:25 am
&copy Bloomberg. Full garbage cans stand near the Washington Monument on the National Mall in Washington, D.C. on Dec. 23, 2018.
US500
-
FDX
-
CSGN
-
GD
-
TXT
-
ESU24
-

(Bloomberg) -- The year-end rout in financial markets may get worse with S&P futures falling as much as 0.9 percent in a volatile morning session. Analysts and strategists say investor sentiment is weakening further amid the federal government shutdown, with no quick end in sight.

The S&P 500 Index has fallen more than 12 percent just in December, on pace for the steepest monthly decline since October 2008, as fear of a possible slowdown in the new year gripped the market. Recent cautious commentary from economic bellwether FedEx Corp (NYSE:FDX). stoked concerns, with warnings about slowing global trade and weakness in the European economy. Investors are also possibly pricing in the impact of a policy error by the Federal Reserve and a weak Chinese economy.

Given the bearish backdrop, a prolonged shutdown can only mean one thing: more sell-off.

“Risk aversion is now extreme; even though the Street may point to a ‘less dovish’ FOMC and concerns about a U.S. government shutdown as possible reasons for the selloff, the apparent lack of positive drivers and headlines has curbed risk appetite,” Nomura strategist Masanari Takada wrote in a note. “While sentiment looks to be skewed towards fear, most market participants seem to be looking for a plausible excuse to sell.”

The bone of contention in the standoff between the two parties is the funding for President Donald Trump’s border wall with Mexico. The next possibility for votes in the House and Senate is Dec. 27, but Democrats have indicated the two sides are far from a deal.

“Best/unlikely case to end partial U.S. Government shutdown would be post-Christmas deal when Congress returns Thursday,” Cowen analysts Roman Schweizer and Cai von Rumohr wrote in a note to clients. “Worst/likely case is after Jan. 3 when Democrats get the House back. We do not see Democrats funding Trump’s Wall.”

Government contractors such as technology service providers may feel some pressure, although Cowen expects any financial impact to be very minor. Science Applications International Corp. might be among the most exposed as its three large NASA programs account for an estimated 7 percent of sales, but Cowen expected the impact to be modest.

While the current shutdown affects only nine out of the fifteen cabinet level departments, and excludes the Department of Defense, the uncertainty will be an overhang on defense stocks.

Jefferies analyst Sheila Kahyaoglu sees “an overhang around the fiscal 2020 budget negotiations that will require compromise on both sides of the aisle and a Budget Agreement to repeal the Sequester.” Defense stocks suffered a setback last week after Secretary of Defense James Mattis resigned following Trump’s announcement about withdrawing troops from Syria.

Mattis’s resignation could be a “material negative event” for 2020 budget negotiations, Credit Suisse (SIX:CSGN) analyst Robert Spingarn said on Dec. 21, noting that Mattis enjoyed broad bipartisan support. The S&P Supercomposite Aerospace and Defense Industry Index (S15AERO) has dropped over 13 percent this month, paced by Triumph Group Inc., Arconic Inc., Textron Inc (NYSE:TXT)., and General Dynamics Corp (NYSE:GD).

© Bloomberg. Full garbage cans stand near the Washington Monument on the National Mall in Washington, D.C. on Dec. 23, 2018.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.