Citi's government shutdown playbook: which stocks to avoid, how volatility may react, and the plan for gold

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It's likely October will start with a U.S. government shutdown. What will that mean for markets? Citi looks at history as a guide.

Early Friday futures skirmishing suggests Wall Street will try to finish the last trading day of a rotten month on a positive note.

First thing to note is that Citi thinks a shutdown is likely, but may be short. Still, as millions of government employees aren’t paid, and with discretionary government spending comprising about 1.9% of gross domestic product, the shutdown could trim GDP by 0.1 of a percentage point per week. Recent market performance suggests equities may be anticipating a longer shutdown this time, says Citi, “although this sell-off has not come in a vacuum with rising rates a distinguishing feature.”

As for gold GC00, +0.60%, Citi notes there is a clear difference in price action around long and short shutdown episodes: “The precious metal weakens into and out of shorter shutdowns. Near longer shutdowns, however, gold range-trades into the event and then, as the shutdown persists with no clear resolution in sight, gold catches a bid, rallying around 2% on average and holding onto that strength in the ensuing couple of months.

The buzz All eyes are on the August personal consumption expenditure index, released at 8:30 a.m. Eastern. The core PCE is among the Federal Reserve’s favored inflation gauges, and as such equity and bond investors were hoping to see evidence that price pressures continue to ease. They are: the increase in the core annual PCE index fell from 4.3% in July to 3.9% last month.

 

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