New York - As if US markets did not have enough in the way of worries, the threat of another government shutdown has resurfaced and that uncertainty could add to volatility.
Right now, the odds of a government closure are seen as low, but negotiations in Washington have turned acrimonious more often than not in recent years. It comes with the equity market in the midst of a correction as investors grapple with weakening earnings forecasts, China's economic woes and uncertainty surrounding US monetary policy.
Republican leaders in the US Congress on Thursday began advancing bills needed to avoid federal agency shutdowns on October 1 while navigating demands from conservative members to punish healthcare group Planned Parenthood over an abortion controversy.
"This comes at a shaky time for financial markets than when this last happened in 2013," said Robbert van Batenburg, director of market strategy at Societe Generale in New York. "This is an additional uncertainty for markets."
The White House said on Thursday it would veto legislation for continued funding of the government if a bill Congress is considering eliminates federal money for Planned Parenthood.
The odds of a shutdown may have been reduced when US House of Representatives Speaker John Boehner said he will step down from the speakership and leave the House at the end of October. It was seen by some as a sign that Boehner would advance a bill to fund the government - without any complicating factors that would result in a White House veto.
"In essence, this announcement is meant to preempt the expected attempt to remove him from his position after he extends spending authority," wrote economists at Goldman Sachs on Friday.
While the S&P 500 actually rose about 3% during the last government shutdown in 2013, the gains occurred during a year when the index rose nearly 30%. Recent skittishness among investors could increase the possibility of a negative reaction in markets should a shutdown occur.
Were a selloff to occur in the event of a shutdown, it could create safe-haven bids for longer-dated Treasuries. On the flip side, as US lawmakers also seek to prevent an increase in the federal borrowing limit, which may be reached by the end of 2015, interest rates on short-term T-bill issues that mature, and yields on certain Treasury coupon debt, would jump since their repayment would be delayed.
"A shutdown would be supportive of higher-quality bonds and we're already seeing prices being bid up in advance. As you go out the yield spectrum, the weaker-quality bonds are going to suffer in tandem with equities," said Karissa McDonough, director of fixed income strategy at People's United Bank Wealth Management in Burlington, Vermont.
Volatility would kick up if a compromise is not reached, and stocks are already in the midst of a volatile stretch. Since August 20, more than half of the trading sessions have seen moves of at least 1 percent in either direction on the benchmark index.
"As you transition towards the later stages of negotiations, if they can't get to a conclusion or a deal done, then absolutely the markets will take that as a third arrow in the quiver on market volatility and potential downside," said David Lyon, global investment specialist at JP Morgan Private Bank in San Francisco.
This week's calendar hardly lacks for catalysts. A host of Fed members are scheduled to speak, including Federal Reserve Chair Janet Yellen, New York Fed President William Dudley, Chicago President Charles Evans and San Francisco President John Williams.
Investors will also eye reports on housing and manufacturing, with the week culminating with the September payrolls report. Expectations call for job growth of 206 000 versus the prior 173 000, with the unemployment rate expected to hold steady at 5.1%.