US government shutdown "set to break records," markets already struggling—could Thursday be the turning point?
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US government shutdown "set to break records," markets already struggling—could Thursday be the turning point?
This deadlock is sending shockwaves through financial markets, with a liquidity-draining effect comparable to multiple rounds of interest rate hikes.
Navigating Web3 tides with focused insightsAuthor: Ye Zhen
Source: Wall Street Insights
The U.S. government shutdown is pushing financial markets toward a dangerous edge, but within the crisis lies potential for resolution, as signals emerge from Capitol Hill that bipartisan negotiations are making progress, with some Republican lawmakers expressing optimism about reaching a deal this week.
Tuesday saw U.S. markets suffer a "Black Tuesday." Warnings from CEOs of major Wall Street banks about overheated stock valuations ignited investor anxiety, compounded by fears that the government shutdown could worsen liquidity conditions, triggering massive sell-offs in risk assets. The Nasdaq and S&P 500 recorded their largest single-day declines in nearly a month, with tech stocks and semiconductor shares 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 liquidations across the cryptocurrency market. Safe-haven demand drove the dollar index higher for a fifth consecutive day, hitting a three-month high, while the British pound, offshore renminbi, and commodities broadly came under pressure.
At the heart of this market turmoil lies Washington's political deadlock. On Tuesday, the current U.S. government shutdown entered its 35th day, matching the longest shutdown on record set during 2018–2019.
However, according to media reports, some Republican lawmakers predict the impasse may end this week. Markwayne Mullin, a Republican senator from Oklahoma, expressed "great confidence" that an agreement could be reached this week, specifically noting, "I think we could possibly wrap it up tomorrow night (Wednesday)... but more likely on Thursday."
"Shutdown Equals Rate Hike": Liquidity Crisis Emerges
Beneath the market turbulence looms a growing liquidity crisis, with the government shutdown seen as a primary driver.
As previously reported by Wall Street Insights, analysis shows that the shutdown has forced the U.S. Treasury to rapidly increase the balance in its General Account (TGA) at the Federal Reserve—from around $300 billion to over $1 trillion in the past three months, the highest level in nearly five years. This process effectively drained more than $700 billion in cash from financial markets.
This massive withdrawal of liquidity has had a tightening effect comparable to multiple rate hikes. Key funding rate indicators are now flashing red. According to Bloomberg, the Secured Overnight Financing Rate (SOFR) surged 22 basis points on October 31, well above the Federal Reserve's target interest rate range, indicating that actual financing costs in the market have not declined despite the Fed's rate cuts. Meanwhile, usage of the Fed's Standing Repo Facility (SRF) has also approached historic highs.
Data shows that reserve balances at the Federal Reserve have dropped to their lowest level since early 2021. American Bank liquidity experts Mark Cabana and Katie Craig warn that the deterioration in funding conditions could take on a dangerous self-reinforcing dynamic; without intervention, it might trigger a repo crisis similar to that of September 2019.
Thursday Could Bring a Breakthrough? Bipartisan Talks Show Signs of Progress
Despite mounting market pain, the political deadlock appears to be nearing a breakthrough.
According to media reports, as the shutdown enters its record-setting 35th day, some senators predict the stalemate could end this week. Markwayne Mullin, a Republican senator from Oklahoma, said he is "very confident" an agreement can be reached this week, adding, "I think we could possibly complete it tomorrow night (Wednesday)... but more likely on Thursday."
Mullin and other Republican lawmakers believe Tuesday’s local elections were a key factor. They claim Democratic leader Chuck Schumer previously instructed his members to delay voting to avoid suppressing turnout among progressive voters. Eric Schmitt, a Republican senator from Missouri, predicts that once the elections are over, Democrats will no longer have a reason to continue blocking the deal.
The human cost of the shutdown is becoming increasingly evident, placing immense pressure on both parties. According to the Financial Times, funding for the Supplemental Nutrition Assistance Program (SNAP), relied upon by over 40 million Americans, expired last weekend, and preschool programs for low-income children have already closed in some areas. Analysts from Goldman Sachs and Citigroup likewise predict the government is highly likely to reopen within the next two weeks.
Divisions Emerge Within Democratic Party
Yet the path to an agreement is far from smooth, with clear divisions emerging within the Democratic Party.
According to media reports, some moderate Democrats, unable to bear the suffering caused by the shutdown, are considering accepting a compromise: passing a temporary funding bill to reopen the government in exchange for Republican commitments to hold future votes on extending subsidies under the Affordable Care Act (ACA).
But this "reopen first, vote later" approach has angered the party's progressive wing.
Vermont Senator Bernie Sanders bluntly stated that if Democrats "capitulate" on this point, it would be "a betrayal of millions of working families." Connecticut Senator Chris Murphy also said believing a party that currently opposes extending subsidies will change its stance a month later is nothing short of "delusional."
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