The US government shutdown is pushing financial markets to the brink, yet signs of progress in bipartisan negotiations suggest a potential resolution this week, with some Republican lawmakers expressing optimism about reaching a deal.
On Tuesday, US markets suffered a "Black Tuesday" as warnings from Wall Street CEOs about overvalued stocks amplified investor anxiety. Coupled with fears of worsening liquidity strains due to the shutdown, risk assets faced a broad sell-off. The Nasdaq and S&P 500 recorded their steepest single-day declines in nearly a month, with tech and semiconductor stocks hit hardest.
Panic quickly spread to other markets. Bitcoin fell below $100,000 for the first time since June, triggering over $1.3 billion in crypto liquidations. Safe-haven demand drove the US dollar index to a three-month high, marking its fifth consecutive daily gain, while the British pound, offshore yuan, and commodities broadly weakened.
At the heart of the turmoil lies Washington’s political deadlock. Tuesday marked the 35th day of the shutdown, tying the record set in 2018–2019. However, some Republican senators, including Oklahoma’s Markwayne Mullin, expressed confidence in a breakthrough this week, suggesting a deal could emerge as early as Thursday.
**"Shutdown Equals Rate Hikes": Liquidity Crisis Emerges** The market volatility reflects a deepening liquidity crunch, with the shutdown acting as a key catalyst. Analysis shows the US Treasury has drained over $700 billion from markets by rapidly increasing its Federal Reserve account balance to over $1 trillion—a five-year high. This liquidity withdrawal has had a tightening effect comparable to multiple rate hikes.
Key funding metrics are flashing red. The Secured Overnight Financing Rate (SOFR) spiked 22 basis points on October 31, far above the Fed’s target range, signaling elevated borrowing costs despite rate cuts. Meanwhile, usage of the Fed’s Standing Repo Facility (SRF) neared record highs. Bank reserves have dwindled to their lowest since early 2021, prompting warnings from Bank of America analysts that unchecked deterioration could trigger a 2019-style repo crisis.
**Thursday’s Turning Point? Bipartisan Talks Show Promise** As the shutdown enters uncharted territory, pressure mounts on both parties. Over 40 million Americans relying on SNAP benefits faced disruptions last weekend, while childcare programs for low-income families shuttered in some areas. Goldman Sachs and Citi analysts predict the government will likely reopen within two weeks.
Republican senators argue Tuesday’s local elections may break the impasse, with Missouri’s Eric Schmitt claiming Democrats delayed votes to avoid suppressing liberal turnout. Yet divisions within the Democratic Party complicate negotiations. Moderates reportedly favor a stopgap funding bill in exchange for a future GOP vote on Affordable Care Act (ACA) subsidies, but progressives like Bernie Sanders reject this as a "betrayal of working families."
Connecticut Senator Chris Murphy dismissed hopes of Republican cooperation, calling such expectations "self-delusion." The path to a deal remains fraught, even as the shutdown’s economic toll grows steeper.