Safe Havens Surge Amid US Shutdown and Market Uncertainty

Dubai, UAE :

Global financial markets experienced unusual dynamics last week as the prolonged US federal government shutdown created a data vacuum, leaving investors to navigate markets with limited economic guidance. Traditional safe-haven assets, including gold and the Swiss franc, saw notable inflows, while equities impressively maintained record highs. Bonds and the Euro, however, largely moved sideways, staying within familiar ranges. Adding complexity, concerns about US credit quality emerged after a few high-profile defaults, though credit spreads remain historically low. Emerging market currencies generally strengthened, though moves were moderate and lacked a clear directional trend.

Enrique Díaz-Álvarez, Chief Economist at Ebury, commented:

"The drought of US economic data caused by the federal shutdown is set to ease slightly this week. Friday’s CPI inflation report for September will be released to allow social security pension adjustments. Economists anticipate inflation to remain elevated in the 3-4% range, well above the Fed’s target, highlighting a divergence with the central bank’s dovish stance. Meanwhile, UK inflation data on Wednesday, alongside global PMI indicators, could make Friday a particularly volatile session for markets worldwide."

US Dollar (USD):

The absence of fresh US economic data is compelling markets to interpret other developments—such as private credit setbacks—as potentially more significant than they are. While these incidents have yet to reveal systemic risks, the macroeconomic backdrop remains favorable for credit amid monetary easing despite elevated inflation. Markets anticipate Friday’s delayed US inflation report to show persistent 3-4% annualized headline and core inflation, unlikely to prevent the Federal Reserve from continuing its planned easing over the next two meetings.

British Pound (GBP):

UK labor market data indicate gradual loosening, with limited job creation and no significant layoffs. GDP continues to reflect modest growth of around 1%, presenting the Bank of England with a dilemma similar to the Fed’s: persistent inflation near 4% coexisting with soft labor markets. This week’s inflation readings will be pivotal in shaping the next interest rate decisions, as the Bank appears reluctant to pursue a full easing cycle while inflation remains elevated.

Euro (EUR):

The French government gained temporary parliamentary relief last week, though at the cost of shelving modest pension reform plans. A recent credit downgrade for French sovereign debt has had little immediate market impact, particularly in early Asian trading. With the European Central Bank having concluded its easing cycle, the path forward appears clearer than for the Fed or Bank of England. However, last week’s upward revision in Eurozone core inflation emphasizes that additional cuts remain unlikely without significant economic changes.

The ongoing US government shutdown has highlighted the market’s reliance on safe-haven assets during periods of uncertainty. While gold and the Swiss franc benefited from inflows, equities showed remarkable resilience, and bonds remained stable. As global inflation data and PMI indicators are released later this week, markets may experience heightened volatility, providing investors with crucial signals for the next phase of economic policy adjustments.