As we creep closer to the Dec. 24 government shutdown deadline, the ongoing impasse between Trump and Schumer has sent PredictIt's shutdown odds to a contract high of 58%, suggesting the market is confident the US government will shutdown at midnight on Friday 21.

And so as both traders and pundits are convinced the market will likely shut down at midnight on December 21st, here’s what to expect courtesy of UBS analyst Peter Hahn.

The good news, is that in this particular instance, the impact to price action should be largely discounted – 5 out of 12 appropriation bills accounting for 75% of discretionary spending have already been approved, so only 25% of discretionary spending is at risk. Even if 100% of discretionary spending were at risk, we would generally need to see a prolonged shutdown before there were to be a meaningful impact to growth.

Having said that, it can be useful to understand what typically happens in price action even if in order to fade the move the market gets it wrong (in either direction). UBS took a look at the moves in equities, rates, curves, and USD in various time windows leading into the government shutdown across 19 shutdowns since 1976 (Tables 1 and 2). The Swiss bank also measured the largest move (from minimum to maximum or vice versa) within 1 month of the shutdown to get a sense for which direction the volatility was. DXY lower and curves steeper were the most consistent asset price moves ahead of upcoming government shutdowns, where each moved more than 60% of the time in all of the given windows, indicating a robustness in the signal.

Table 1: Moves in major asset classes ahead of 19 government shutdowns



Table 2: Dates of government shutdown included in sample



A broad rule of thumb may be to discount any potential move by 75% given the partial nature of a potential shutdown on December 21st, but in the event that a shutdown looks like it may drag on for longer than expected, the past can at least help us to understand the direction in which the risk may end up going.

See below for a more detailed look into what to expect around the mechanics of the government shutdown process

Government Shutdown: A Quick Look: